This article first appeared in the St. Louis Beacon: July 17, 2008 - The last thing investors in Wachovia Corp. need is more bad news, given that the giant bank recently replaced its CEO and warned that second-quarter results would be dreadful.
Unfortunately, they got extra bad news Thursday as officers of the Missouri secretary of state inspected the St. Louis headquarters of its Wachovia Securities brokerage unit. The headquarters once belonged to A.G. Edwards, which was acquired by Wachovia last year.
The 10 inspectors, who included securities officers from several states, were looking for documents and records related to the marketing of auction rate securities. Last month, Robin Carnahan, the secretary of state, said auction rate securities were one of the 10 top threats to Missouri investors this year.
Carnahan's office served subpoenas on more than a dozen Wachovia Securities executives and agents. Carnahan ordered the on-site inspection because the firm "had not fully complied" with a data request made in April. Her office also is looking at auction-rate complaints against other firms including Commerce Bank and Stifel, Nicolaus & Co.
Carnahan initiated an investigation of auction-rate securities at Wachovia and other sellers of these complex products in April. In a statement, she said these securities are often touted by brokers as being as safe and simple as money-market funds or cash deposits.
"Auction rate securities are municipal bonds, corporate bonds or preferred stocks with interest rates or dividend yields that are periodically re-set" through auctions, says the Securities and Exchange Commission. Auctions can take place every 7, 14, 21, 28 or 35 days.
"Recent developments in the credit market have led many of the ... auctions to fail, which may prevent existing investors from selling their auction-rate securities holdings," says the website of the Financial Industry Regulatory Authority, a non-governmental regulatory authority for securities firms. "Investors who treated these securities as a ready source of cash are finding themselves short on readily available funds."
MANY COMPLAINTS
These securities can yield higher returns than Treasury bonds and notes or money-market funds, but that's no comfort to people who can't get their money.
"Hundreds of Missouri investors have called my office because of [the] inability to access their money," Carnahan said in Thursday's statement. "They were told these investments were safe and easy to cash in. Our office is doing all we can to find solutions that will make these investors whole."
Carnahan said the Missouri Securities Division has received more than 70 formal complaints in the past four months, alleging that more than $40 million has been denied to investors. This investment is the biggest source of complaints since she took office in January 2005.
Wachovia said Thursday that "many" securities firms are responding to questions from regulators. "The discussions that are occurring today are part of this ongoing process," the bank's statement said.
Auction-rate securities have long been controversial, and both A.G. Edwards and Wachovia Capital Markets have been cited by the SEC for improper practices.
In May 2006, the SEC announced that 15 firms, while neither admitting nor denying guilt, would refrain from certain practices and pay a total of $13 million in penalties. Each firm was censured.
A.G. Edwards and Wachovia each paid $125,000. Many of the country's largest investment banks, including the recently departed Bear Stearns, each paid fines of $1.5 million.
Ironically, Wachovia's stock climbed Thursday, up $2.90 to close at $13.44. But that gain was due to the coattail effect of a broad market rally in which shares of many giant banks surged.
This advance pales in comparison to the flogging that Wachovia, big banks and many other investment banking firms have been receiving for quite some time. Since early May, Wachovia's stock is down about 55 percent. Since early October, it's off about 75 percent.
Wachovia's stock closed at $54.55 on May 30, 2007, the day before Wachovia bid for A.G. Edwards. Many analysts had predicted Wachovia would trade in the $60s one year after the merger. Not only is the stock down but the dividend has been cut by 41 percent.
MORE WACHOVIA WOES
So far this month, three investment banking firms have dropped their ratings on Wachovia, including Oppenheimer & Co. which cut its rating to underperform from perform.
"As more news about Wachovia comes out, we're increasingly convinced that the outlook is bleak for equity shareholders," said analyst Meredith Whitney in a July 15 report. She spent 23 pages dissecting the company's finances and didn't mention Wachovia Securities or A.G. Edwards.
"Expenses simply cannot come down fast enough, seriously jeopardizing Wachovia's ability to grow earnings," said Whitney, who doesn't own shares. The overwhelming problem is Wachovia's mortgage portfolio due primarily to its ill-fated purchase of Golden West Financial Corp. in 2006.
Whitney's report was delivered six weeks after Wachovia said CEO G. Kennedy Thompson was "retiring at the request of the board." Last week, Robert K. Steel, a former undersecretary in the U.S. Treasury Department, was named CEO of the Charlotte, N.C.-based bank.
Steel's appointment was accompanied by the announcement that the company expects to report an after-tax loss of $2.6 billion to $2.8 billion for the second quarter. That's a loss of $1.23 to $1.33 per share, excluding the impact of one-time charges.
Formal results will be unveiled July 22 at which time Wachovia said it will "provide additional information about current and future initiatives to rationalize its cost structure and further enhance the capital efficiency of its balance sheet, including reducing its mortgage exposure."