Wachovia Shouldn't Slow Wells Fargo Down

Wells Fargo (WFC) enters 2009 nearly twice the size it was last year, after closing its $12.7 billion acquisition of Wachovia on New Year's Eve.

The California-based bank's stellar recent track record, however, could be challenged by the addition of its East Coast counterpart. Wells shares currently trade at a premium to others in the financial space, thanks to the bank's conservative lending culture and strong price-to-earnings ratio. But while Wachovia offers a nice path to growth by expanding Wells Fargo's retail footprint in large markets like Florida, Virginia and New Jersey, it also brings a lot of baggage in the form of its troublesome mortgage portfolio.

Both Wells and Wachovia have tried to mitigate risk going forward. Ahead of the merger, approved by Wachovia shareholders on Dec. 23 and closed Wednesday, Wachovia took a $23.89 billion loss stemming from an $18.79 billion goodwill impairment charge tied to the Wells deal and a $6.63 billion provision for credit losses. Wells has therefore already incurred some of the damage.

Uncertainties nevertheless remain. Wachovia has not always had a good handle on the performance of its own securities portfolio. In May, Wachovia had to restate its first-quarter loss, making it 80% worse than originally reported, after writing down assets related to its life insurance business. Wachovia also ran into legal trouble earlier this year for its dealings in auction-rate securities.

The question for Wells is whether Wachovia's assets will continue to pose unforeseen problems. The main culprit in Wachovia's woes has been an option-adjustable rate mortgage portfolio the bank took on when it acquired mortgage lender Golden West in 2006.