The Back Alley Archives

Wachovia Corp. said it will raise $7 billion in capital through stock sales and cut its dividend by 41%, a consequence of its ill-timed move into the mortgage industry, as it swung to a first-quarter net loss caused by $2 billion in "market-disruption" losses and sinking credit quality.

The common- and preferred-stock sales are "in response to unprecedented economic conditions," said Chairman and Chief Executive Ken Thompson. He added the company is "extremely pleased with the strong expressions of interest we've already received regarding these issuances, which demonstrate the confidence of investors in our fundamental strengths and long-term outlook."

Terms weren't disclosed in a press release, but The Wall Street Journal reported that Wachovia was expected to sell shares for $23 to $24 apiece, a more than 15% discount to Friday's closing price of $27.81. Wachovia shares fell 12%, to $24.48, in premarket trading Monday.

The infusion represents Wachovia's second dip into the capital trough this year. In January and early February, Wachovia pocketed a total of $8.3 billion in capital by issuing preferred stock and other securities to investors

The second round is a sign that banks' fortunes have continued to deteriorate over the past month. While some investors feel confident that the worst of the market crisis is in the rearview mirror, many observers believe that this is the beginning of the troubles for regional banks, which are likely to suffer from rising loan defaults, especially if the economy sinks into a deep recession.

Wachovia's current problems stem largely from its $25.5 billion purchase of Golden West nearly two years ago, a move that barreled the company into adjustable-rate mortgages near the peak of the housing market.

Wachovia executives initially trumpeted the deal as an ideal way to grab a foothold in California, where Golden West was based. While the heart of Golden West's business was nontraditional mortgages, Mr. Thompson assured jittery investors that Golden West's tough underwriting standards and decades of experience meant that Golden West was well-positioned to weather an anticipated slowdown in housing markets.