Even when including merger costs, Wachovia (NYSE:WB) way underpermformed expectations, as they were only able to birng in a net income of $51 million for the quarter, equal to 3 cents a share. Last year in the same quarter the company enjoyed $2.3 billion in net income, or $1.20 a share. That's 98 percent in contrast to the year before.
While the write-down of $3 billion wasn't unexpected, analysts still were looking for a profit of 32 cents a share. When taking away the costs of the merger, the company was far short of the $160 million and 8 cents a share looked for on Wall Street.
Similar to other financial institutions, Wachovia underestimated the credit problems it is ensnared in. As Michael Mullaney at Fiduciary Trust Co in Boston said, "It suggests they were light in their estimates of bad credit earlier and are playing catch-up," said Michael Mullaney, who helps invest $10 billion at Fiduciary Trust Co in Boston, which owns the bank's shares. "I hope it doesn't portend even greater losses down the road."
The company has now set aside $1.5 billion in connection with credit losses. That's seven times what they had set aside a year ago, and over three times the $408 million set aside for last quarter.
In what I think of as a typical funny, but sad commentary all CEOs of public companies make when they have a bad quarter, Wachovia CEO Ken Thompson said about the company's performance, that "with the exception of structured products and with the exception of credit issues going on in the mortgage market, every part of our company other than that is having excellent results."
These types of comments are irritating because every single business leader in the world could say the same thing. Of course the company performance would be better if the things that caused it to be poor weren't part of the equation. What is a comment like that supposed to mean?
It would be better to simply list the pros and cons, let the shareholders see exactly what happened, and leave it at that.
Of course every company will have bad good and bad news across its various properties and divisions. When the bad news outweighs the good, you've got a quarter like Wachovia suffered. It's best to just leave it at that.
What was really happening in those comments is Thompson has built the company on structured products while he's been there. Now that investors are turning away from them, his entire strategy has overall failed. That leaves him open to having action taken against him, possibly similar to what has happened to other CEOs in this industry.
Don't misunderstand what's going on here, Thompson is fighting for his job right now, regardless of the public front being put on.
He should be. This industry is all about risk management, and many of those companies now suffering from the subprime and credit problems failed completely in that regard. Wachovia is now partaking in that reality.
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