By Evelyn Juan and Marshall Eckblad

Of DOW JONES NEWSWIRES

Wachovia Corp.’s (WB) interim CEO, Lanty Smith, told employees that the troubled bank, which needs to conserve capital as it faces mounting losses from souring mortgages, will begin a companywide effort to reduce expenses.

Smith announced the broad cost-cutting measures in a memo dated Friday; a copy was reviewed by Dow Jones Newswires.

“The easiest capital that we can generate to support our business and the needs of our customers and clients,” Smith wrote, “is the expense dollars we save.”

Smith’s memo also told employees that David Carroll, Wachovia’s head of its capital-management group, will coordinate the effort, which will cut across all the Charlotte-based bank’s business lines.

Smith said each division will manage its own cost-reduction effort and the company will place stricter guidelines on employee expenses like travel, meetings and consulting fees.

Lanty told employees in the memo to ask themselves two questions when considering an expense: First, if the expense is the best use of shareholder money, and secondly, if the expense is absolutely necessary now.

Christy Phillips-Brown, a spokeswoman for the company, said Monday that “with the current economic environment, it’s important for our company to carefully evaluate every expense within the company.”

Smith’s memo emphasized that the company “will not shortchange our emphasis on enhancing risk management, compliance, or governance controls.”

On Monday, the bank announced that it had made permanent modifications to its closely watched portfolio of “Pick-A-Pay” loans, or adjustable-rate loans that offered borrowers the choice of four monthly payments, including a minimal interest-only payment that actually increased the borrower’s balance.

Those Pick-A-Pay loans have accounted for much of Wachovia’s recent woes.

G. Kennedy Thompson, the former CEO, said in April that most of Wachovia’s problems in the first quarter stemmed from its 2006 purchase of mortgage lender Golden West, a pioneer in certain kinds of adjustable-rate mortgages that are now being hammered by rising loan defaults. At the end of the first quarter, 3.8% of Wachovia’s Pick-a-Pay mortgages were in non-performing status, up from 0.8% a year earlier. Approximately 60% of the loans are tied to properties in California, a region badly mired in falling housing values.

Wachovia said in Monday’s announcement that it is waiving all prepayment fees associated with the loans and will no longer offer negative-amortization loans, or loans that can increase a borrower’s balance. The company also said that it is acting aggressively to help borrowers avoid foreclosure, and has helped about 18,000 homeowners over the last 12 months.

A Focus on Capital

Raising and conserving capital has become a primary focus for the bank, which in recent months has confronted rising delinquencies among the bank’s consumer loans as well as a slide in investors’ confidence.

In April, Wachovia swung to a first-quarter loss of $393 million, slashed its dividend by 40%, and raised $8 billion in fresh capital.

In May, Wachovia refiled its first-quarter loss to reflect a wider net loss of $708 million because of write-downs related to life insurance contracts.

In early June, Wachovia’s board of directors ousted Thompson, replacing him with Smith after months of shareholder criticism. Later in June, a report from Lehman Brothers Holdings Inc. warned that Wachovia could soon cut its dividend again.

And on Monday, a report published by the New York Post suggested a joint venture with Prudential Financial Inc. (PRU) could soon cost Wachovia more than $1 billion should Prudential force Wachovia to purchase its stake in the venture.

Last week, Wachovia confirmed that it has hired Goldman Sachs Group Inc. to study its portfolios of mortgage loans - a likely effort to gauge the market value of those loans should Wachovia want to sell them.

The flurry of troubling news has sent the price of Wachovia stock plunging. Shares on Monday hit a new 52-week low of $14.70, or more than 72% off their 52- week high of $53.10. Shares closed down 4.3% to $15.53.

“Because the external economic environment is beyond our control,” Smith said in the memo, “we are intensely focused on what we can control.”

-By Evelyn Juan, Dow Jones Newswires; 416-306-2025; evelyn.juan@dowjones.com; and Marshall Eckblad, 201-938-4306; marshall,eckblad@dowjones.com

(David Enrich and Kathy Shwiff contributed to this report.)

Source: CNN