Wachovia CEO defends $7 billion plan

Ken Thompson says planned stock sale and dividend cut was done to insulate bank from eroding housing market, not in response to regulatory scrutiny.

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By David Ellis, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Wachovia Chairman and CEO Ken Thompson defended plans to raise $7 billion in capital through a stock offering announced Monday, citing fears of a protracted downturn in the housing market and rejecting suggestions that the sale was done at the behest of regulators.

During a conference call, Thompson told analysts that the stock sale, which would include an equal mix of both common and preferred shares, was done to gird the company's balance sheet against future mortgage-related losses.

"This was not simply to fill a hole in our balance sheet," said Thompson. "[It was done to] increase sharply capital ratios to deal with any conceivable circumstances that might develop in the future."

Wachovia (WB, Fortune 500) witnessed the impact of a worsening housing market first hand in recent months.The company reported a surprising first-quarter loss of $350 million Monday, hurt, in part, by its ill-timed 2006 acquisition of California mortgage lender Golden West Financial Corp.

The Charlotte-based bank, which is the first of a group of banks expected to report dreary results, also said Monday it would cut its quarterly dividend by 41% to 37.5 cents, a move it hopes would save the company $2.1 billion annually.

Thompson, however, rejected the notion that the dividend cut and the planned stock sale was done under pressure from federal regulators, who have been keeping a close eye on the capital levels of banks and other large financial services firms in the wake of last month's near collapse of Bear Stearns (BSC, Fortune 500).

"This was a decision we made that the right thing to do at this point was to take on a lot of capital and get prepared," Thompson said during a question and answer session on the conference call.

What Thompson and his fellow Wachovia executives seem to be preparing for is further weakness in the U.S. economy and rising loan losses, driven in large part by its mortgage portfolio.

Don Truslow, Wachovia's chief risk officer, said the company expected home prices to continue to fall through 2008 before finally hitting bottom sometime in the middle of 2009.

As a result of Monday's announcements, Thompson said the company's Tier 1 capital ratio, a gauge of the bank's ability to absorb huge losses, would hover around 8.75% by the end of 2009. Federal regulators require a bank to have a Tier 1 ratio of 4%. A bank with a ratio of 6% or more is considered to be well-capitalized.

But the Wachovia chief also apologized to current shareholders, who will bear the brunt of the capital-raising efforts. Besides seeing their dividend payments slashed, Wachovia shares fell 10% in Monday morning trade, following the news.

"I know these actions are not without costs," said Thompson. "I wish they were not necessary, but they are." To top of page

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