State Street Girds
For Subprime Fallout
by Donna Kardos
From The Wall Street Journal Online
January 04, 2008
The U.S. subprime mortgage meltdown claimed another victim Thursday, as State Street Corp. said it is setting aside $618 million to cover legal and other costs arising from missteps in its fixed-income strategies and replaced the chief executive of its investment-management unit.
State Street said it decided to set up the reserve to cover its legal exposure after some customers complained investments in subprime mortgages may have been made inappropriately. The firm said some of its fixed-income strategies were hurt by exposure to subprime mortgages and acknowledged some of its customers' concerns, but said it would fight other claims.
"Some of our customers that were invested in the active fixed-income strategies have raised concerns that we intend to address," State Street CEO Ronald Logue said in a release. "Nevertheless, we will continue to defend ourselves vigorously against inappropriate claims, including those that seek recovery of investment losses arising solely from changes in market conditions."
The Boston financial-services firm plans to take an after-tax charge of $279 million, or 71 cents a share, to cover the cost of the reserve. But State Street also said its earnings and revenue, excluding the charge, should top a forecast made in October.
State Street's shares closed Wednesday at $78.80 and slipped to $78.34 in recent premarket trading Thursday morning. The shares rose 20% in 2007.
The issues announced Thursday involve State Street Global Advisors, the firm's investment-management arm. The CEO of that unit, William W. Hunt, is stepping down. His interim replacement will be James Phalen, currently head of international operations for investment servicing and investment research and trading. State Street is looking for a permanent CEO for the unit.
In a filing with the Securities and Exchange Commission, State Street said Mr. Hunt is entitled to severance valued at about $14.1 million. He'll get no bonus for 2007.
State Street didn't detail its problems, but a number of asset managers including Legg Mason Inc., BlackRock Inc. and Bank of America Corp. have been hit after their cash funds stretched for extra yield by investing in assets that later blew up, such as commercial paper issued by so-called structured investment vehicles or securities linked to subprime mortgages.
In November, State Street Global Advisors let go three executives on its bond team, including its chief investment officer for investments in North America.
State Street said Thursday it expects to earn between $3.42 and $3.45 a share in 2007. Excluding the charge announced Thursday and other items, the company said it expects 2007 earnings of $4.54 to $4.57 a share and revenue growth of more than 20% to 22%. Both figures are above the ranges State Street forecast Oct. 16.
The current mean estimate of analysts polled by Thomson Financial was for earnings of $4.19 a share.
--Steve Goldstein contributed to this article.
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