STT -State Street: $9B in potential losses, layoffs to come

State Street: $9B in potential losses, layoffs to come
Boston Business Journal - by Craig M. Douglas


State Street Corp. was hit with $800 million in charge-offs during the fourth quarter and warned in a regulatory filing Friday it had another $9.1 billion in unrealized losses tied to soured investment securities and commercial-paper obligations on its books.

Of those write downs, the Boston-based financial services giant said nearly half — some $306 million in charge-offs during the quarter — are tied to a restructuring plan that will cut jobs and reduce other operating expenses. The cuts were not detailed in Friday’s filing with the Securities and Exchange Commission. However, the company said it expected to be finished with the downsizing by the end of the first quarter.

Calls to State Street were not returned Monday.

State Street (NYSE: STT) also took a $450 million fourth-quarter charge related to the purchase of impaired securities managed through “investment pools” on behalf of its clients.

The bank said it indemnified $1 billion in customer investment contracts with Lehman Brothers and has since established a $200 million reserve fund to cover any losses stemming from that move. Lehman filed for bankruptcy protection in September. State Street said it and its clients had another $312 million and $325 million in claims, respectively, against Lehman, which served as a prime broker and fund manager for a variety of State Street accounts.

Of State Street's $9.1 billion in unrealized losses, $5.5 billion was tied to its portfolio of investment securities. In the fourth quarter, it took a direct $78 million charge-off linked to that portfolio and warned that more losses could result if the assets in those portfolios continue to sour.

The company also said it has $3.6 billion in unrealized losses linked to its commercial paper program, which uses conduits to issues short-term debt on behalf of its large institutional clients. State Street has been obligated to purchase those securities and provide liquidity to its clients as the market for so-called short-term paper has dried up.

Friday’s filing with the SEC was intended to update State Street’s risk factors — namely, to confirm that the now-reported billions in unrealized losses could materially and adversely affect the company’s business if those assets were “determined to be other-than-temporarily impaired.”

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