Wachovia losses tied to hedge fund
CHARLOTTE -- A faltering Citigroup hedge fund is the source of a big insurance-related writedown Wachovia announced this month, the Charlotte bank confirmed Tuesday.
Wachovia's first-quarter loss grew to $707 million this month after it took a $314 million reduction to earnings because of losses in its insurance portfolio. The bank previously had provided few details on the source of the loss.
The bank is one of many financial institutions to park money in so-called bank-owned life insurance, or BOLI. This insurance is taken out on upper-level employees and pays out when they die. The insurance also serves as an investment vehicle in which the earnings aren't taxed. Banks have used the money they make to offset the cause of employee benefits.
In a more complex version of the insurance, the premiums paid for the insurance are placed in an investment vehicle -- in this case the Falcon Fund hedge fund run by New York-based Citigroup. Banks also can take out so-called "stable value agreements" that are designed to cover potential losses in these separate accounts. Wachovia had such agreements but had to take a writedown anyway.
Cincinnati-based Fifth Third Bancorp also has suffered from BOLI losses related to the Falcon Fund. It's suing two units of Dutch insurer Aegon NV -- Transamerica Life Insurance and Clark Consulting -- for allegedly failing to properly manage the investment.
Fifth Third is seeking $323 million in damages. Charlotte-based Bank of America provided stable value agreements to Fifth Third, according to the suit, but is not named as a defendant.
Wachovia spokeswoman Christy Phillips-Brown said the bank's BOLI losses are related to the Falcon Fund. She declined to comment on whether Transamerica, Clark Consulting or Bank of America were involved in its investments. The Wall Street Journal reported the bank's connection to the Falcon Fund on Tuesday.
Wachovia has said it could ultimately receive benefits from its stable value agreements that could result in gains in future quarters.
The Falcon Fund is one of two Citigroup hedge funds to reportedly lose more than 75 percent of their value in a global credit crunch marked by the plunging value of mortgage-related investments. Citigroup has offered to cover the losses of some investors, which has included retail customers of the bank's Smith Barney brokerage unit.
"As with many other credit-based investment products, Falcon's returns have been hurt by one of the most volatile periods for fixed-income (investments) in recent memory," a Citigroup spokesman said.
At the end of March, Wachovia had $14.9 billion in assets in BOLI, according to a quarterly securities filing. Bank of America had about $14.5 billion in life insurance, according to a filing with the Federal Deposit Insurance Corp. Bank of America hasn't disclosed any writedowns.
Barry Dyke, a New Hampshire investment adviser who has studied BOLI, said other banks will likely face losses. "It's a much bigger issue," he said.
Bank-owned life insurance had been seen as a safe place for banks to invest their capital but it's grown increasingly risky, said Dyke, president of Castle Asset Management LLC. "What has happened is banks took a really good thing and corrupted the purpose," he said.
The insurance writedowns is one of a number of missteps that has plagued Wachovai in recent weeks. It reached a $144 million settlement with regulators over its ties to telemarketers and has said it expects a $1 billion charge in the second quarter because of the accounting of controversial leasing tax shelters.
This story was originally published May 21, 2008 at 12:34 AM with the headline "Wachovia losses tied to hedge fund."