Wachovia bank, which is now a part of Wells Fargo bank, was regarded as the fourth-largest bank holding company in the USA, the financial system of which was based on total assets. The merger with Wells Fargo Bank was stimulated by loan crisis events of the years 2007-2009. Therefore, a thorough analysis of the financial report of the year preceding to the merger will be helpful for assessing the financial situation and potential of the bank.
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The financial situation of Wachovia bank was aggravated by the risky loans. Essential losses in Golden West portfolios brought the financial position of the bank down, and the mortgage crisis became the first step of the financial failure of the bank. Therefore, as it is stated in Wachovia Securities (2008), the first quarter of the year 2007 was featured with $ 2.3 billion in earnings, while an $ 8.9 billion loss was reported in the second quarter of the year 2008.
Regardless of the fact that financial ratios reveal quite effective financial performance, the effectiveness of financial strategy was rather low, as net income fell drastically in 2007-2008. This was caused by the regarded above losses in Golden West portfolios, and the company had to resort to extreme measures – merger with Wells Fargo bank.
As it is stated in Wachovia Securities (2008), the financial activity of the bank involved transactions of securities purchases. These were mainly performed on the basis of sales and repurchase agreements. The key items and objects of repurchase were agreements of the US government, and corporate bonds. Additionally, property, equipment, and leaseholds were performed considering the principles of amortization and accumulated depreciation, therefore, these values are associated with the straight-line basis and estimated useful lives of the property and equipment purchased.
Considering the fact that that the entire financial activity of the bank was divided into three levels, this could not help to stabilize the risks of the depreciating portfolio. Level one involved the assessment of quoted prices and was intended for active markets. Level two involved assessment of the prices for similar instruments, and active market evaluation while identical assessment instruments were used for model-based techniques of market assessment, and observation of the financial situation. Level three was used for non-observable markets and was based on the company’s own estimations and assumptions. As for the valuation techniques that were used for the Wells Fargo bank portfolio, it should be emphasized that the actual value of this portfolio was assessed in accordance with level three techniques (Wachovia Securities, 2008), while the unobservable part of the portfolio was insufficient for the entire stock value.
The financial situation of Wachovia bank involved the improper assessment of the depreciating stock. Since the actual value of the correct evaluation and observation o financial parameters is explained by the opportunity to avoid risks, the bank had to focus on the stabilization of its assets and decreasing liabilities.
Wachovia Securities (2008) A Consolidated Statement of Financial Condition. Wachovia Securities Financial Holdings, LLC.
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