Fitch Ratings has downgraded the Issuer Default Rating (IDR) for Wachovia Corporation (Wachovia) and its subsidiaries to 'A+' from 'AA-'. Fitch has also removed Wachovia from Rating Watch Negative where it was originally placed on June 27. The rating outlook is now negative.

The rating downgrade reflects the increasingly pronounced asset quality deterioration evident in Wachovia's mortgage portfolio, specifically the Golden West-originated Pick-A-Pay, an option adjustable-rate mortgage product, and the resulting pressure created by this asset class on the firm's financial flexibility. Fitch anticipates Wachovia's reported financial performance in the next few quarters will fall short of normal run-rate expectations for a franchise of Wachovia's diversity, depth and rating. The Negative Outlook recognizes that although Fitch believes that Wachovia has attempted to incorporate a conservative view of potential future collateral deterioration, exogenous factors, including home price indices, can deteriorate significantly in a short period of time that may necessitate or accelerate additional meaningful charges and reserve building by Wachovia.

The magnitude of such charges and potential impact on capital could result in a further downgrade of Wachovia's ratings. Conversely, Wachovia's financial performance may recover more quickly if expected losses do not fully materialize. Fitch expects to re-evaluate Wachovia's Rating Outlook over the next few quarters.

Wachovia set aside a $5.6 billion provision for credit losses during second quarter of 2008, much of which represents additional reserve building in anticipation of future charge-offs from the Pick-A-Pay portfolio. Fitch said that other factors contributed to the downgrade, including the combined effects of a number of other factors that have hampered Wachovia's recent results. Among these are continuing charges associated with the dislocations in the credit and capital markets. There were also a number of other items during the quarter including the reversal of $975 million in accelerated tax benefits associated with lease structures (SILOs) which were primarily originated in the 1990's, $590 million in provisions for legal costs, and $283 million of chargeoffs associated with residential construction loans.

Further, the downgrade is consistent with Fitch's view that the macroeconomic environment will remain quite challenging over the intermediate term, with continued home price declines, sustenance of elevated consumer prices on basic necessities and higher unemployment. The performance of consumer receivables, such as mortgages, home equity, credit card and auto loans, is expected to reflect that stress.

Wachovia's second quarter net loss of $8.9 billion results reflects an operating loss of $2.7 billion and goodwill impairment of $6.1 billion. Although goodwill impairment is recognized through the income statement, it is important to note that Fitch routinely subtracts goodwill from capital in its evaluation of capital. Therefore, the goodwill impairment has no effect on Fitch's view of capital. In addition, since regulatory capital ratios also exclude goodwill from capital, there is no effect on regulatory capital from the goodwill impairment charge.

Fitch said that Wachovia's Pick-A-Pay balances totaled approximately $122 billion as of June 30, 2008, representing 72 percent of the firm's total mortgage loans and about 15 percent of consolidated total assets. Commercial real estate loans related to residential housing totaled $11.8 billion. Trends in both these portfolios have been sharply negative and both are anticipated to get worse before they get better. Wachovia's remaining commercial real estate portfolio totals $36.5 billion; this portion of the portfolio has remained solid to date. Nonetheless, this portfolio bears close monitoring, particularly in regions more negatively affected by deterioration in the housing market and rising regional unemployment.