Wachovia Corp., which announced in third-quarter earnings last month that it had boosted provisions for loan losses to $408 million in response to “modest deterioration in credit quality,” today announced a $1.11 billion pre-tax loss in October on its subprime mortgage portfolio.
“Following the October 2007 announcement of third-quarter 2007 results … certain financial markets experienced further deterioration, particularly the markets for subprime residential mortgage-backed securities and for collateralized debt obligations collateralized by (those securities),” the company reported in a U.S. Securities and Exchange Commission filing.
CDOs are used to securitize financial instruments such as bonds, loans and asset-backed securities, and divide them into various risk categories, called tranches.
Wachovia is among a series of financial services companies to announce large write-downs related to subprime mortgage-related assets. Morgan Stanley this week reported that it lost $3.7 billion during the latest quarter on securities related to subprime mortgages, and Citigroup, Merrill Lynch and AIG are among the other companies that have reported multibillion-dollar mortgage losses in the past month. Financial companies’ stocks have taken a hit, too, based on worries of continued losses related to problems in the mortgage and credit markets.
Wachovia reported that rising defaults and delinquencies in subprime residential mortgages, coupled with rating agencies’ downgrades of subprime residential mortgage-related securities contributed to the decline in values for those securities and CDOs collateralized by those securities.
The company reported that it had total exposure to subprime residential mortgage-backed securities of $2.05 billion as of Oct. 31, and the company now expects to record a loan-loss provision for the fourth quarter between $500 million to $600 million in excess of charge-offs for that quarter “due to anticipated loan growth and the impact of continuing credit deterioration in our loan portfolio.”
Also, the company reported, “The expected credit deterioration will likely be focused in certain geographic areas that have recently experienced dramatic declines in housing values. We expect that these declines will correlate to increases in loan losses for loans originated within the last two years within these geographic areas.”
Wachovia’s stock was trading at $39.98 per share as of 12:05 p.m. today, down 32 cents compared with Thursday’s closing price of $40.30 and down $3.22 compared with Tuesday’s closing price of $43.20 per share.
Insurance giant American International Group, in an earnings report this week, also reported write-downs related to mortgages.
The company and its subsidiaries originate residential mortgage loans, provide mortgage guaranty insurance, invest in mortgage-backed securities and CDOS in which the underlying collateral includes residential mortgage loans, and also provides credit protection through credit default swaps for some CDO tranches.
The company reported in its earnings announcement, “The downward cycle in the U.S. housing market is not expected to improve until residential inventories return to a more normal level and the mortgage credit market stabilizes.” Also, the company reported that its mortgage guaranty insurance business will continue to be impacted by the declining market conditions “for the foreseeable future” and that business unit is expected to incur a “significant operating loss” in 2008.
The company reported that about $63 billion of the company’s $78 billion worth of multisector CDO pools includes some exposure to U.S. subprime mortgages.
Also, AIG reported that it its investment portfolio included residential mortgage-backed securities and CDOs with a cost of about $96.8 billion and an estimated fair value of $94.4 billion as of Sept. 30, and the gross unrealized losses related to those investments were $2.7 billion while the gross unrealized gains were $333 million as of Sept. 30.
As of Oct. 31, an estimated $598 million of AIG’s residential mortgage-backed securities that were backed primarily by subprime collateral had been downgraded by rating agency actions this year, while about $236 million of those investments have been upgraded and $819 million was on watch for downgrades.
The New York Times reported that the company’s third-quarter write-downs related to mortgage investments totaled about $2 billion, with an additional write-down of $550 million expected in the fourth quarter.
Martin J. Sullivan, AIG president and CEO, said in a statement, “While U.S. residential mortgage and credit market conditions adversely affected our results, our active and strong risk management processes helped contain the exposure. Our balance sheet remains strong with the financial resources to weather continued uncertainty as well as to take advantage of attractive market opportunities as they emerge.”
The company had net income of $3.09 billion, or $1.19 per share, in the third quarter. That was down 26.8 percent compared with earnings of $4.22 billion, or $1.61 per share, in third-quarter 2006. AIG’s stock was trading at $56.09 per share as of 12:05 p.m. ET today, up 9 cents compared with the closing price of $56 on Thursday. That closing price was down $6.05 per share compared with Tuesday’s closing price of $62.05.
