Wachovia Corp. (WB) has larger problems than its option ARM portfolio, according to Herb Sandler, the man who built Golden West Financial into a powerhouse by inventing the negative amortization mortgage. In remarks published Monday in the Wall Street Journal, Sandler says that Wachovia has much larger fish to fry than its exposure to increasingly troublesome mortgages on its portfolio. Wachovia paid $25 billion for the Northern California-based S&L in 2006, a purchase that has since gone sour on the nation's fourth largest bank. In the first quarter, Wachovia reported that it lost $393 million as it struggled with growing problems with credit quality. "Forget whether you didn't like the Golden West deal. You have a serious list of problems," Sandler told the Journal. Sandler pointed to litany of other bad business decisions at Wachovia, including a telemarketing snafu that saw the bank hurt its reputation by selling customer names to telemarketing firms, as more pertinent factors behind the bank's recent decision to oust CEO Ken Thompson. He also pointed to the fact that the Golden West portfolio is performing well in comparison to peers, with charge-offs at just 0.79 percent by the end of the first quarter. He also suggested that Wachovia was "over-reserving for losses that will never come." That's a strong statement to make, once one looks outside of charge-off activity. Non-performing assets, including non-accrual loans and foreclosed properties, surged strongly in the first quarter at Wachovia. Total NPAs reached 1.74 percent of loans, or $8.3 billion, by the end of the first quarter; that compared to 1.16 percent, $5.4 billion, one quarter earlier -- translating into increase in NPAs of 55.5 percent in just one quarter. Leading that charge in non-performing asset growth? Option ARMs, of course. So-called "pick-a-pay" loans generated $240 million in charge-offs for the quarter, Wachovia said in its first quarter earnings report, by far the largest category of credit losses relative to other sectors. Non-performing assets in option ARMs alone rose to 3.55 percent, up from 2.31 percent just one quarter earlier. "We’re seeing in our portfolio the most significant declines and defaults activity in California," Wachovia's chief risk officer said on an investor conference call in mid-April, "and of course it's the largest concentration for us in the pick a payment portfolio by far." If we've seen anything thus far in the mortgage and housing crisis, it's that banks haven't been reserving enough to cover quickly rising credit costs; many have been forced to take huge hits to their income statements as they absorb massive charges for loans that are expected to be charged-off in subsequent quarters. The above look at the worsening credit quality at Wachovia doesn't account for an additional $3.5 billion in deferred interest -- currently booked as income -- thanks to the innovation of negative amortization, interest that Wachovia may never see if the number of troubled option ARM borrowers continues to increase. In face of growing credit quality problems, suggesting that Wachovia is over-reserving for any actual losses that will be realized out of its option ARM portfolio seems to be premature.