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Wachovia becomes latest US bank to seek lifeline

As concern spread on Friday that more banks might run into trouble even with a US$700 billion rescue for the financial system, Wachovia, one of those hardest hit by the housing crisis, became the latest to reach for a lifeline.

Weighed down by a huge portfolio of troubled mortgage loans, the country’s fourth-largest bank by assets entered into preliminary deal talks with Citigroup, and extended feelers to Wells Fargo and Banco Santander of Spain, people briefed on the matter said.

The talks were at an early stage and there was no certainty of a deal. But it appeared Wachovia was seeking potential alternatives should the bailout plan being debated in Washington not pass quickly, or fail to provide enough help.

Wachovia has a US$120 billion portfolio of mortgages loaded with adjustable interest-rate loans that allow borrowers to skip part of their monthly payments, much of which it inherited from its ill-timed acquisition of Golden West, the big California lender, in 2006.

In July, the bank hired Robert Steel, a former vice chairman at Goldman Sachs, from the Treasury Department, where he worked with Treasury Secretary Henry Paulson to resolve the mortgage market crisis. Steel vowed to keep Wachovia independent and sought to raise US$5 billion in capital.

But the bank’s shares, which are down nearly 80 percent in the last year, plunged 27 percent on Friday, to US$10, as investors wondered about its health after the government’s seizure of Washington Mutual on Thursday.

“Wachovia has a real problem,” Len Blum of the investment bank Westwood Capital said. “Option ARMs are probably the worst mortgage products out there and Wachovia has a lot more of them than it has in tangible equity.”

Also See: Paulson’s US$700 billion financial rescue package is ill-concieved
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