Investors question financial sector rebound

Investors who were growing optimistic after a string of upbeat bank results in recent days were jolted Tuesday when Wachovia, the nation's fourth-largest bank, racked up an $8.86 billion loss because of charges and reserves for bad mortgage loans. The Charlotte-based bank also cut its dividend for the second time this year and eliminated 10,750 positions.

Washington Mutual, the nation's largest savings and loan, delivered a further blow, swinging to a $3.33 billion loss as it boosted its loan loss reserve to more than $8 billion, betting it will have more soured mortgages.

Both companies warned of steep cost cuts--Wachovia said it was eliminating 10,750, positions, including those held by 6,350 current workers. Seattle-based WaMu said it would be cutting up to $1 billion in expenses by the end of 2009.

And several regional banks also posted losses Tuesday or said their profits fell.

Wachovia's results, coming before trading began on Wall Street, initially sent financial and other stocks falling. The stock market revived as the price of oil skidded again, and so Wachovia's stock rose 27 percent--but with WaMu's results released after the close underscoring the problems in the financial sector, selling could resume when the market opens on Wednesday.

"Wachovia's news isn't isolated. I think there is still a structural issue with U.S. banks," said Russell Walker, a risk management professor at the Kellogg School of Management at Northwestern University. "Many of the banks, including Wachovia, are still facing challenges."

The banks' results were especially sobering after better-than-estimated reports from Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. had raised hopes that most of the damage from the credit crisis had occurred. Wachovia's crosstown rival, Bank of America Corp., also managed to beat Wall Street expectations.

Global banks and brokerages already have written down some $300 billion of mortgage-backed securities and other risky investments since the crisis began last year and there are fears that more write-downs are ahead as more mortgages fail. Questions remain about which companies will have to raise additional capital going forward, and just how much will be needed.

In the meantime, many are making sharp cutbacks to their mortgage operations--which got the banks into trouble during the housing boom by making loans to too many risky customers. On Monday, Wachovia said it will stop offering home loans through brokers. Other big banks, such as Bank of America and National City Corp., have already stopped making loans through brokers entirely, relying instead on their loan officers.