2 top banks remove leaders

Washington Mutual, Wachovia bow to shareholders

June 03, 2008|By E. Scott Reckard | E. Scott Reckard,LOS ANGELES TIMES

The mortgage meltdown scorched the executive suites of two banks yesterday as Wachovia Corp. fired its chief executive and Washington Mutual Inc. knuckled under to shareholders and stripped its CEO of his chairman's post.

Charlotte, N.C.-based Wachovia and Seattle-based Washington Mutual are big players in home loans, on which they've lost billions. Their shake-ups helped rattle the stock market, sending a bank share index to a five-year low, as investors worried about more fallout from the mortgage crisis.

The Dow Jones industrials sank more than 200 points before recovering to close at 12,503.82, down 134.50 points, or 1.1 percent.

Wachovia, which ousted CEO G. Kennedy Thompson yesterday, bought adjustable-rate mortgage giant World Savings of Oakland, Calif., in 2006 - just as the housing market peaked. It lost $393 million in the first quarter and slashed its dividend by 41 percent. It also raised $7 billion in new capital - strengthening its balance sheet but diluting the stakes of existing shareholders.

But mortgage losses weren't the only troubles faced by Thompson, who was stripped of his chairman's title May 8.

Wachovia agreed to pay $18.9 million in April to federal bank regulators to settle a probe into allegedly improper telemarketing to customers, many of them elderly. And the Securities and Exchange Commission is investigating its marketing of auction-rate securities - investments that were supposed to be safe and easily tradable but have had a hard time finding buyers amid the credit crunch.

Wachovia tapped its new chairman, Lanty Smith, to serve as interim CEO and also named an interim chief operating officer.

In a statement, Smith said no single event had triggered Thompson's firing. He instead cited "previously disclosed disappointments and setbacks" that "cumulatively have negatively impacted the company and its performance." As a result, Smith said, "The board believes new leadership will help to revitalize and re-energize Wachovia and enable it to realize its potential."

Its shares fell 40 cents yesterday to $23.40, down from a 52-week high of $54.95.

Washington Mutual, where CEO Kerry Killinger lost his chairman's title, is made up largely of former California savings and loans acquired as Killinger built the nation's largest S&L.

Washington Mutual posted a first-quarter loss of $1.14 billion and slashed its dividend from 15 cents to 1 cent a share. It was also forced to dilute the holdings of its shareholders, accepting a $7-billion capital injection from private investors.

Shareholders at Washington Mutual's annual meeting in April approved an advisory resolution asking for the chairmanship to be separate from the CEO job.

The board had opposed the resolution but yielded to the affirmative vote.

"We believe this is a clear acknowledgment of important failings by Mr. Killinger and the board in managing risk to shareholders," said Steve Abrecht, executive director of a Service Employees International Union retirement trust, which owns Washington Mutual stock.

Its shares fell 2 cents to $9, down from a 52-week high of $44.60.

Thompson, 58, a 32-year Wachovia veteran, joins a bankers' ex-CEO club that includes Stanley O'Neal at Merrill Lynch & Co. and Charles Prince at Citigroup Inc., who were shown the door after their banks recorded huge losses stemming from bad mortgages.

Under Thompson, Wachovia agreed to pay about $25 billion for World Savings parent Golden West Financial Corp. just before the mortgage markets began crumbling.

The deal has been widely criticized, particularly because World specialized in a controversial loan known as an option ARM - an adjustable-rate mortgage that gave borrowers the choice of paying so little that their balance went up instead of down.

Defaults on option ARMs, including those in Wachovia's portfolio, have shot up as home prices have fallen.

Thompson had defended the deal, in part because it expanded his bank's mortgage business and in part because it gave Wachovia an entry into California, the largest U.S. retail banking market.

Thompson couldn't be reached for comment yesterday. In an early morning call with investors, interim CEO Smith said no immediate changes in Wachovia's strategies were planned.

Another CEO under fire for a controversial mortgage purchase is Kenneth D. Lewis of Bank of America Corp., which agreed to buy Countrywide Financial Corp. of Calabasas, Calif., the largest U.S. home lender, early this year. Bank of America shares have fallen for four consecutive months and lost 1.3 percent yesterday to close at $33.58, a five-year low.

Lewis continued to defend the deal yesterday, telling investors that it would provide gains even if U.S. home prices drop by 25 percent in the next two years, as BofA expects.

"We don't have our heads in the sand" regarding the housing market, Lewis said.

E. Scott Reckard writes for the Los Angeles Times.

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