State Street Q2 2008

Under the rosy picture the company painted there loomed risk. The comany reported strong earnings above expectation: 1.37 eps vs 1.07 Q2 in 07. Revenue rose to 2.67 bil. The main contriutor is from net interest revenue where the company earn spread between customers' deposits and high yield assets. Thanks to lower interest rate, the company were able to reap high spread during the downturn environment. Accounting Shangnian But one major piece is missing in the NIR discloure: provision. Nearly $70 bil investment portfolio contributed the interest bearing revenue, but its provision is only disclosed in comprenhensive income, not income statement, because it is classified as available-for-sale, not trading, securities. This is somewhat against the major methods wall street banks used. At the end of Q2 08, the unrealized loss is approximately $2 bil. FASB is expected to issue a revision of FIN-46, which might impact the accounting treatment of conduits. STT may have to consolidate the conduits by then. Menial loss It has 27.2 bil exposure to agency MBS, unrealized loss is 445 mil, ~2% haircut; 4.3 bil exposure to CMBS, unrealized loss is 75 mil, ~2% haircut. The 'writeoff' seem lower than those disclosed by competitors. Potential loss It has a large exposure to UK and European RMBS, $6.6 bil. Until now, only unrealized loss together is just 0.3 bil. As Euro and UK housing slump and recession come along, we expect another 0.7 bil loss ahead. Thoughts Try to shy away from the company stocks, but its credit should be relatively ok given its strengthened capital position.