"How do you make a small fortune?" Or so goes the question. "Start with a large one and get into the adjustable rate mortgage business," apparently is the answer for Wachovia. The Wall Street Journal reports today (but not, surely before you read it in our Opening Bell) that the bank is going to the equity markets a second time this year to shore up their balance sheet. This is amusing given that it wasn't long ago that Ken Thompson, Wachovia's Chairman and CEO, was busily assuring investors that, contrary to their worries and owing to its decades of experience and rigorous credit standards, the acquisition of mortgage group Golden West was a stroke of genius in this dark times. (Just ignore the new reserves for doubtful accounts behind the curtain). Then again, given the way the market responds to announced losses and shareholder dilution these days, perhaps we should be buying at the open.
Still, ignoring what management says for a moment, the Journal posits:
...many observers believe that this is the beginning of the troubles for regional banks, which are likely to suffer from rising loan defaults, especially if the economy sinks into a deep recession.
This prompts an interesting question. Which of the large retail banks are exposed to slowdowns in ways that might make one nervous?
An easy proxy for this discussion is watching the antics over at National City, where the bank has been anxiously courting suitors to cope with what must be daunting capital concerns. In a classic "who knows what the hell the markets are thinking" moment, somewhat reminiscent of rallies by UBS and Lehman to news that they were diluting existing shareholders and announcing huge write-offs, the entry of a new bidder (Bank of Nova Scotia) prompted even more market despair. Apparently, the sense was that since BNS was unlikely to realize any synergies of substance they probably couldn't close the deal at an attractive price and, therefore, Key Bank or Fifth Third must be out of the running.
Personally, I think that's over-thinking things. The answer to sudden foreign bank interest might be a lot more obvious: