In Wachovia Report, a SIV Case Study

Wachovia Corp. was not alone last week in reporting third-quarter earnings that fell short of expectations in large part as a result of this summer's turmoil in the capital markets. But one piece of news made Wachovia stand out from its rivals. In spelling out its $1.3 billion of market-related losses, the company noted a $50 million mark-to-market write down related to $7 billion of assets it had moved to a structured investment vehicle but moved back to the balance sheet during the quarter. In doing so, Wachovia provided a clear example of how the SIV structure has backfired for some companies that used it to move assets off their balance sheet. "Had we always kept them on the balance sheet ... the asset quality would have still been acceptable," Thomas Wurtz, the $754.2 billion-asset Charlotte company's chief financial officer, said in an interview Friday. "We're very comfortable with the quality of those assets." G. Kennedy Thompson, Wachovia's chairman, president, and chief executive, said that he plans to apply the lessons it learned during the quarter. However, unlike Bank of America Corp.'s chairman and CEO, Kenneth D. Lewis, who talked of scaling back in investment banking after absorbing a hit there, Mr. Thompson said, "You will not see substantial shifts in our business." According to Mr. Wurtz, Wachovia expects to be a "pretty insignificant" participant in the so-called super SIV that Citigroup Inc., JPMorgan Chase & Co., and Bank of America Corp. are assembling at the Treasury Department's urging to purchase assets held by such vehicles. Wachovia would get involved only if "we can structure the corporate governance," he said, and even though it wants to be supportive, the company has "no interest in playing a manager role. Also, Wachovia has no internal plans for future SIVs, Mr. Wurtz said. "I don't think there will be much of a market." Excluding $22 million, or a penny a share, of merger-related charges, Wachovia reported earnings of 90 cents a share. The average forecast of analysts had called for earnings of $1.03 a share, according to Thomson Financial. During a conference call to discuss the quarter's results, Mr. Thompson noted his disappointment but said: "Rest assured, we will apply the lessons of the recent extraordinary market conditions to adjust our infrastructure and governance and make our company even stronger. I'm confident that our company is in the right businesses for the long term." The corporate and investment bank's senior managers "continue to have my full support," he said, though he does plan to take steps to cut expenses there. A spokeswoman said Wachovia plans to fire about 200 employees in the investment bank this year.