Wachovia reported an unexpected loss yesterday as a jump in foreclosures in California and Florida contributed heavily to a $4.4 billion (£2.2 billion) writedown in the first quarter.

The fourth-biggest American bank reacted to the loss by announcing plans to raise $7 billion through a rights issue, cutting its quarterly dividend by 41 per cent and by eliminating 500 investment banking jobs.

About $2.8 billion of the writedown related to “credit losses” on its portfolio of home loans, while the remaining $1.6 billion stemmed from declining valuations of securities such as collateralised debt obligations – complex pools of mortgage-backed bonds. The writedowns left the group with an overall loss of $393 million for the period, compared with a $2.3 billion profit last time and well below the consensus analyst forecast of about $720 million in profits.

The group’s shares closed down $2.50, almost 9 per cent, at $25.31.

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Wachovia’s poor results came as Bear Stearns, which is preparing to be acquired by JPMorgan, revealed that its profits also fell short of expectations in the first quarter, with its net income declining by 79 per cent to $115 million, on the back of a 40 per cent dip in revenues to $1.48 billion.

Ken Thompson, the chief executive of Wachovia, said: “I am deeply disappointed with our first-quarter results . . . The provision largely reflected more severe deterioration in the residential housing market, particularly in specific markets in California and Florida.”

Many of Wachovia’s troubles relate to its $24 billion acquisition of Golden West Financial, of California, in 2006, near the peak of the housing boom in the United States. Golden West specialised in “Pick-a-Pay” adjustable-rate mortgages, which allow borrowers to skip some of their monthly payments and add the amount to their principal.

However, this type of mortgage has been among the highest to default, accounting for $1.1 billion of Wachovia’s $2.8 billion of first-quarter credit losses. Wachovia said that it would cut its quarterly dividend from 64 cents to 37½ cents to save $2 billion a year.

Standard & Poor’s, the ratings agency, changed its outlook on Wachovia’s long-term debt from “stable” to “negative” yesterday, making a downgrade more likely. Other writedowns are expected this week, as Citigroup, Merrill Lynch and JPMorgan are expected to announce further sub-prime-related hits.

Separately, it emerged that Credit Suisse may need to take a writedown of between SwFr3 billion (£1.5 billion) and SwFr5 billion for its first quarter.

It is understood that Deutsche Bank is negotiating with a consortium of private equity firms to offload about $20 billion of its backlog of about $55 billion of leveraged loans. Sources said that potential buyers included Apollo, the American distressed-asset investor, and TPG, the US private equity group.

Both were part of a syndicate, with Blackstone, that agreed last week to buy about $12 billion of Citigroup’s loans backlog. To induce the private equity firms, the banks are having to lend them large amounts of money to buy the debt.

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