Wachovia shares pare losses Tuesday afternoon

Shares of Wachovia fell 76 cents, or 7.7 percent, to $9.08. Earlier in the session, shares hit a 17-year low of $7.80 after Whitney cut her rating to "Underperform" from "Perform."

"We're increasingly convinced that the outlook is bleak for equity shareholders," of Wachovia, Whitney wrote in a research note.

Whitney said Wachovia is reducing its balance sheet as it deals with mounting loan losses. As it works to reduce its balance sheet, assets and net interest income will also decline and cost reductions will not match the rate of lost revenue, she said. That will reduce the bank's "ability to grow earnings," Whitney wrote in the note.

Like many other banks, Wachovia has faced mounting losses from a sharp rise in mortgage defaults. Wachovia's option adjustable-rate mortgage portfolio has been especially hit hard.

Whitney projects Wachovia will cut its mortgage portfolio by 9 percent compared with the first quarter.

Option ARMs are loans that allow customers to pick from one of multiple payment options each month, including a payment for less than the interest due on the loan.

Option ARMS have been among the worst-performing loans, as falling house prices coupled with minimal payments by customers, left some homeowners owing more on their homes than their current value.

On Wednesday, Wachovia said it lost between $2.6 billion and $2.8 billion as it released preliminary quarterly results. Wachovia said it set aside $4.2 billion during the second quarter to cover rising defaults in its loan portfolios.

Wachovia also named Robert Steel its new chief executive as it looks to shake up management and improve its operations. Steel mostly recently served as under secretary in the Treasury Department.