Credit Herald

NEW YORK — How could a $24 billion loss possibly be good news? When it comes from Wachovia as an effort to primp itself for its acquisition by Wells Fargo.

Wachovia Corp.’s staggering loss for the third quarter resulted primarily because it wrote down the value of intangible assets by almost $19 billion and built up its loan loss reserves by $4.8 billion, moves that seemed to please its suitor.

"It was prudent for Wachovia to put these losses behind (it)," said Wells Fargo Chief Financial Officer Howard Atkins in a news release. "The asset write-downs, reserve build, and other items are consistent with our acquisition assumptions."

Wells Fargo can use the losses reported by Wachovia to shelter years of profits after it acquires the Charlotte, N.C.-based bank.

Late last month, the Internal Revenue Service issued a surprise ruling that boosts banks’ ability to offset the losses from loans and other bad debts held by banks they acquire. The guidance allows banks to take larger tax write-offs against future profits and makes the bargain-basement $14 billion all-stock Wachovia deal all the more attractive for San Francisco-based Wells Fargo.

The ruling removes any limitation on how much a company can offset its income with the losses of an acquired company.

Wells Fargo has said it expects to write down Wachovia’s loan portfolio by about $74 billion faxless pay advances.

For the period ended Sept. 30, Wachovia reported a net loss, after paying preferred dividends, of $23.89 billion, or $11.18 per share, compared with earnings of $1.62 billion, or 85 cents per share, a year earlier.

Excluding a goodwill impairment charge of $18.7 billion and merger-related and restructuring expense of $414 million, the bank lost $4.76 billion, or $2.23 per share.

Analysts polled by Thomson Reuters, on average, had expected earnings of 2 cents per share. Analyst estimates typically exclude one-time items.

A majority of Wachovia’s $18.7 billion writedown relates to the bank’s retail and small business unit, under which its troubled Pick-a-Pay mortgage portfolio is included.

Essentially, Wachovia was forced to write down the value of these assets because they were considered overvalued compared with the market value — or what Wells Fargo was willing to pay. The charge has no impact on Wachovia’s capital levels.

During the quarter, Wachovia set aside a $6.63 billion provision for credit losses. Included in this amount was $3.4 billion to build its reserves to cover losses in the Pick-a-Pay loan portfolio, which Wachovia inherited through its $25 billion acquisition of mortgage lender Golden West Financial Corp. in 2006.

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