Quoting the Crisis

But Wachovia also brings credit problems that could take years to resolve. A big worry is its range of “Pick-A-Pay” retail loans, which allowed borrowers to defer principal as well as interest payments: of those that were still current at the time of the merger, 3.2% were seriously delinquent as of June 30th, up from 1.1% in March. The default rate on the bank’s $38 billion of property-development loans is several times the national average (though Wells argues that the official numbers do not reflect merger-related adjustments). A big chunk of its $127 billion commercial-property portfolio consists of interest-only loans with a balloon payment at the end, the wholesale equivalent of Pick-A-Pays. These will be hard to refinance.

Another worry is the large amount of credit protection that Wachovia is thought to have sold on risky tranches of mortgage-backed securities. Wells points to its latest filing, which shows $105 billion of protection sold and a similar amount bought. But the extent to which the latter really offsets the former is unclear.