Subprime's Lure Fatal for Wachovia, National City

The pattern is too familiar. Two profitable, respected banks with limited exposure to mortgages get greedy and try to cash in on the subprime craze. Both end up ready to go out of existence.

That's the case with National City Bank of Cleveland and Wachovia of Charlotte, N.C.

Not that long ago, National City was a pillar of the Cleveland business society. Founded in 1845, the bank reliably loaned money and took in deposits. Mortgages brought in a small 5 percent of total profit. Then in the latter boom years of the late 1990s, National City wanted to put its profits on afterburner. So in 1999, it bought California subprime lender First Franklin. Within a few years, mortgages were half of National City's profit and the bank was the country's sixth biggest housing lender.

National City pumped money into then-hot real estate markets such as Florida. Closer to home, it backed Cleveland's attempt at yet another renaissance by putting money into fixer-upper houses in such reviving neighborhoods as Slavic Village hard by some steel mills.

By 2005, it was obvious the subprime initiative had become toxic. But the bank did nothing to correct what would prove a fatal mistake. The bank unloaded First Franklin in late 2006 to Merrill Lynch for $1.3 billion, about five times what it had paid for it. But the bank retained about $25 billion worth of dodgy loans.

Ditto Wachovia. Once a conservative Southern stalwart, Wachovia had such a good reputation for quality and good service that downtrodden First Union Bank took it over just to capture its brand name.

Just like National City, the First Union version of Wachovia got greedy. In 2006, despite clear signs that the real estate bubble was going to burst, Wachovia bought California's Golden West Finanical for $24.3 billion. It picked up $122 billion in adjustible rate mortgages and much subprime lending.

By 2008, the party was over. Both National City and Wachovia saw their stock tumbling. Wachovia is being foldd into Wells Fargo. After being told the federal government would not bail it out, National City last week agreed to be sold to PNC Financial Services Group of Pittsburgh.