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July 15, 2008

Economy: Analysts Warn On Wachovia Bank As It Is Downgraded

Analyst warns on Wachovia amid more bank worries

The situation is increasingly bleak for Wachovia Corp. and the bank’s mortgage portfolio will continue to lose value, “seriously jeopardizing” the company’s ability to generate earnings, an influential analyst warned on Tuesday.

The latest note of caution came as the government moved to reassure people their money is safe in the nation’s banks. Yet fears about the system persisted and financial shares were broadly lower Tuesday, signaling another tough day for the stock market.

Federal Reserve Chairman Ben Bernanke is scheduled to brief Congress Tuesday on the economy, which has been walloped by high energy prices and fallout from the housing slump and credit crunch. The testimony also comes amid a backdrop of rising oil prices and a slumping dollar, and as stock markets overseas tumble amid worries about the U.S. financial system.

Bernanke will also specifically address a rescue plan crafted over the weekend for mortgage financiers Fannie Mae and Freddie Mac, which hold or guarantee more than $5 trillion in mortgages — almost half of the nation’s total.

On Monday, shares of U.S. banks and financial companies swooned on concern that the government plan to shore up Fannie and Freddie would not be enough to keep them from failing, which could undermine the U.S. and global financial system.

National City Corp. shares fell nearly 15 percent on rumors of financial trouble, even though it said it was experiencing no unusual activity. Washington Mutual Inc.’s shares fell 35 percent amid worries about whether it had enough cash to handle the mortgage market downturn. WaMu said that it did.

In Asia and Europe, lack of confidence in U.S. regulators’ ability to contain the problems sent shares tumbling.

Oppenheimer Co. analyst Meredith Whitney added to the concerns in downgrading Wachovia, citing a “very real scenario” of declining assets and rising losses. Whitney is closely followed after a series of sharp calls during the credit crisis about troubles at other banks, including Citigroup.

Wachovia shares fell more than 14 percent in early trading, while National City shares also dropped 14 percent. Shares of Fannie Mae and Freddie Mac both fell more than 15 percent, and Citigroup and Bank of America both shed 5 percent.

But the government’s top bank watchdog went on television to ensure people their deposits were not at risk, despite the brewing crisis.

“Insured deposits are absolutely safe,” Sheila Bair, FDIC chairwoman, said in an interview on CBS’ “The Early Show.” “The banking system as a whole is absolutely safe.”



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