Following a streak of bad luck, staggering losses tied to mortgage debt, and massive job cuts, Wachovia could be forced to sell its asset management unit, Evergreen Investments, to raise much-needed capital.
Speculation of the Evergreen Investments sale first surfaced following an announcement that the nation’s fourth-largest bank has agreed to buy back $8.5 billion in auction rate securities as part of a fraud investigation led by Missouri Secretary of State Robin Carnahan.
Wachovia’s agreement with Carnahan, as well as New York Attorney General Andrew Cuomo and the Securities and Exchange Commission (SEC), is the latest in several recent settlements by Wall Street investment banks and securities firms as they try to put claims of auction rate abuses behind them. As part of its deal, Wachovia will pay a $50 million fine, and must buy back all illiquid auction rate securities from retail customers, charities and small businesses by Nov. 28, 2009
In addition, Wachovia is required to make no-interest loans immediately available for any investor who needs liquidity before the auction buyouts are finalized.
In the past week-and-a-half, Citigroup, UBS, JP Morgan Chase and Morgan Stanley all have agreed to repurchase a combined total of $32.6 billion in auction rate securities and pay fines of more than $300 million. As with a number of Wall Street investment banks, the collapse of the auction rate securities market in February created a public relations nightmare for Wachovia. In July, after being deluged with complaints from investors who said Wachovia brokers had intentionally misled them about the liquidity risks of the auction rate bonds, securities regulators from several states launched a surprise raid at the St. Louis headquarters of Wachovia Securities.
Trouble over auction rate securities sales may be minuscule, however, compared to Wachovia’s other problems. On Aug. 11, 2008 the bank was forced to revise its second-quarter loss from the prior month to $8.92 billion from $8.66 billion. It is the worst loss in the company’s history. Wachovia also plans to cut nearly 7,000 jobs, 600 more than it said three weeks ago.
Wachovia attributes much of its recent difficulties to the disastrous purchase of Golden West Financial, a California mortgage company specializing in loans that enabled borrowers to pay less than their full mortgage payment. Wachovia purchased Golden West in 2006 for $25 billion. The acquisition of Golden West turned out to be anything but golden for Wachovia following last year’s collapse of the housing market. Wachovia’s stock is down 53 percent this year.
And now Evergreen Investments potentially could be on the selling block. Evergreen made headlines in June, when it announced plans to liquidate its Ultra Short Opportunities Fund. The fund, which had more than 70% of its assets tied to toxic subprime mortgages, lost 20% over a period of 16 days. In 2008, it was named as one of the two worst-performing ultra short bond funds of the year.
Several investors have filed lawsuits against Evergreen and Wachovia, alleging that the fund’s managers withheld information from them about the extent of investments made by the fund in risky mortgage-backed securities. Several investors have since filed lawsuits against Evergreen and Wachovia.
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