Wachovia battens down the hatches

Wachovia Corp., the fourth-largest U.S. bank, will cut expenses next year by $1.5 billion and is “tapping the brakes” on risk, Chief Executive Robert Steel told investors Tuesday.

Severance and other costs for the Charlotte, N.C.-based lender will reach as much as $650 million in the second half of 2008 as it eliminates jobs, Steel said at a conference in New York run by Lehman Bros. Holdings Inc., which is having its own troubles -- Lehman’s shares fell 41% Tuesday on news that its hoped-for infusion of cash from a Korean bank fell through.

Wachovia expects 12% of its option-ARM loans -- adjustable-rate mortgages that let borrowers skip part of their monthly payments -- to fail, Steel said.

Steel, hired two months ago to replace Kennedy Thompson, is slashing expenses and reducing risk as losses mount from Wachovia’s $122 billion in option-ARMs. Investors are waiting to hear what assets Steel will keep or sell to turn around the bank, which lost almost $10 billion in the first half of the year.

“We have a very good and tough plan to work through this and we’re optimistic this will work,” he said. The company is evaluating units that could fetch “several hundreds of millions of dollars, not billions of dollars,” Steel said.

Commercial and consumer lending will be trimmed by as much as $11 billion this year, according to the bank’s presentation.

Wachovia shares fell $2.75, or 14.5% to $16.24 Tuesday. The bank has lost more than half its market value this year.

Wachovia has said it would dismiss 6,950 employees and leave 4,400 jobs open. More than 80% of those who will be terminated have been informed, Steel said..

The lender expects to take a $171-million pretax charge after selling $509 million in preferred shares of government-sponsored entities, according to Steel’s presentation.