May 9 (Bloomberg) -- Wachovia Corp. Chief Executive Officer Kennedy Thompson, under fire for buying a California lender as the housing market peaked in 2006, was stripped of his role as chairman of the fourth-largest U.S. bank.

Lanty Smith will become non-executive chairman, Charlotte, North Carolina-based Wachovia said in a statement yesterday. Thompson, 57, remains on the board and retains full management responsibility, spokeswoman Christy Phillips Brown said.

A group of shareholders demanded at last month's annual meeting that Thompson quit after the bank posted its first quarterly loss since 2001 because of writedowns of securities backed by subprime loans and rising home loan defaults. Thompson said this year that Wachovia's $24 billion purchase of Golden West Financial Corp. in 2006 was ``ill-timed.'' About half of the unit's lending is in California and Florida, two states with some of the highest foreclosure rates.

``This is caving into pressure because they know the lawsuits are inevitably coming,'' said Nancy Bush, an independent bank analyst in Aiken, South Carolina, who rates Wachovia ``hold.'' Splitting the CEO's and chairman's jobs ``is a corporate governance move that should have been done years ago.''

Wachovia fell 20 cents to $27.63 at 4:05 p.m. in New York Stock Exchange trading. The shares declined 27 percent this year before today, third-worst in the 24-company KBW Bank Index.

`Hot Seat'

Thompson's credibility was dented May 6 when the bank said its first-quarter loss was $708 million, 80 percent more than what Wachovia reported last month, because of writedowns for bank-owned insurance policies. Wachovia cut its dividend by 41 percent last month and raised almost $8 billion by selling preferred stock to ensure the bank will have enough capital.

Thompson endured more criticism as the bank agreed to pay as much as $144 million to settle complaints that it allowed telemarketers to loot customer accounts, and incurred a $1 billion charge tied to bad tax accounting for leases.

``Ken Thompson is in a very hot seat,'' said Jaime Peters, an analyst at Chicago-based Morningstar Inc. ``People are starting to call for his head the same way that they were calling for Chuck Prince's at Citigroup.''

`100 Percent'

Citigroup Inc. replaced CEO Charles O. Prince after posting a record fourth-quarter loss. Morningstar rates Wachovia at three out of five stars, similar to a hold rating, she said.

In the statement, Thompson said the management change frees him ``to focus 100 percent of my time and attention on guiding the company through the current environment.''

Wachovia declined to discuss the change beyond yesterday's statement, and said Thompson and Smith weren't available for comment. Smith, listed as 65 years old in the bank's most recent proxy and chairman of Tippet Capital in Raleigh, North Carolina, has been a Wachovia director since 1987. He's also chairman of the executive committee.

``At least we have a board here that isn't so out of touch that they won't respond to concerns of shareholders,'' said Richard Clayton, research director of the union-sponsored CtW Investment Group. ``There are plenty of other companies with lousy performance that haven't been willing to move like Wachovia has.''

Wachovia shareholders in 2004 voted against a proposal to split the chairman and CEO posts. The bank's board opposed that effort, noting that non-management directors met privately at least three times a year. The issue hasn't been on the company's annual proxy statements since then.

`Disingenuous'

Smith was criticized last month for telling the Wall Street Journal that ``it was disingenuous'' for shareholders to be surprised by the dividend cut. At the annual meeting, he reiterated that press reports and analyst comments had indicated a reduced payout was possible.

``Those comments were incredibly insulting to shareholders,'' Bush said, noting that Thompson and other senior officials previously stressed that a dividend cut wasn't under consideration. ``This is a guy who told the shareholders, `Too bad.' I don't find him an improvement over Mr. Thompson.''

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

Last Updated: May 9, 2008 16:23 EDT