Why Wachovia Needs Another $7 Billion

Why does Wachovia need another $7 billion of equity capital, on top of the $8.3 billion it raised earlier this year? It's not like its capital ratios are particularly gruesome: as of March 31, its Tier 1 capital ratio was 7.5%, slightly higher than a year ago, and its total capital ratio was 12.1%, up from 11.4% a year ago. And that's despite the fact that its loan loss provisions have risen from 0.80% to 1.37% of total loans.

Yes, Wachovia is losing money, but it's hardly losing $7 billion: its unexpected quarterly loss was $393 million. And yet it's raising new capital at somewhere in the region of $23.50 per share, which is very expensive, given that book value is $36.40.

Most likely this capital infusion is an attempt to prepare for an enormous write-down related to the $25.5 billion acquisition of mortgage lender Golden West Financial in May 2006. If Golden West's business is worth only say $5 billion today, then at some point Wachovia's going to have to take an enormous one-time loss, and it doesn't have the capital to be able to do that right now.