Wachovia Exposes Warts Before Wells Wedding Day

Wachovia (WB Quote) reported a miserable third quarter in which cumulative losses on its soured option adjustable-rate mortgage portfolio nearly doubled, as the bank sought to lay out its warts ahead of its merger with Wells Fargo (WFC Quote).

Charlotte, N.C.-based Wachovia on Wednesday reported a net loss of $23.9 billion in the third quarter, after taking an $18.8 billion goodwill impairment charge ahead of the Wells Fargo deal's completion in the fourth quarter. Wachovia also saw losses exacerbated by a $6.6 billion credit provision, most of which went to reserve-building against poor quality loans acquired through its ill-fated purchase of lender Golden West.

"Overall, it was an extremely noisy quarter in which it appears Wachovia was attempting to get as much of their potential losses behind them before the acquisition by Wells Fargo closes," writes Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners.

Wachovia lost $11.18 a share compared to a loss of $9.1 billion, or $4.31 a share, in the second quarter and a profit of $1.6 billion, or 85 cents a share in the third quarter last year. Excluding an $18.7 billion after-tax charge for goodwill impairment, $414 million in net merger-related and restructuring expenses, Wachovia posted a net loss of $4.76 billion, or $2.23 a share.

The company listed a host of special charges for the quarter. It had $2.5 billion of market disruption losses including $1.2 billion securities writedowns; $350 million of principal trading losses, not to mention auction rate securities expenses, support of Evergreen money market fund exposure to Lehman Brothers and losses on government sponsored entity preferred stock totaling $1.1 billion.