State Street Heads-Up Finds Trouble Is Brewing

By SHEFALI ANAND and JENNIFER LEVITZ Institutional money-management firm State Street Corp., relatively unscathed by the financial crunch, is facing potential losses in key areas, which threaten to pull it into the mire with so many others. State Street on Tuesday is expected to report fourth-quarter earnings upwards of $1 a share for 2008's fourth-quarter, up from the year-earlier period's 57 cents a share. But beneath that, trouble is brewing. On Friday night, just ahead of the long holiday weekend, the company in effect gave investors a heads-up. While the firm booked healthy revenue growth in the first three quarters of 2008, its Securities and Exchange Commission filing Friday said some of its conservative, cash-like investments lost value and it is sitting on $5.5 billion of unrealized after-tax losses on its investment portfolio. In addition, there are $3.6 billion in unrealized losses on its other vehicles, known as conduits, which issue asset-backed commercial paper. Further, in the fourth quarter, it took a $450 million charge to cover declines in the value of investment pools known as "stable value" funds. Plus, the firm said some of its unregistered "cash collateral pools," which aim to maintain a $1 net asset value, fell below this target because of declines in the value of the underlying assets, without specifying when that happened. The firm said "a substantial portion" of the declines in these assets came in the fourth quarter. State Street said it has been redeeming its clients, primarily institutional, at $1, partly because none of the securities in the pools "is currently in default or considered by the pools to be impaired," the filing said. If it has to book further losses, State Street may end up under pressure to raise more capital to cover them, which is tough to do these days. And it also may be forced into putting the suffering conduits, now not listed on its balance sheet, onto its books. Gerard Cassidy, bank analyst with RBC Capital Markets, said the Friday filing likely was meant to prepare investors for "meaningful" and "adverse" issues with State Street's investment portfolio. "We believe the assets in our conduits and investment portfolio to be of high quality, and we continue to believe that that they will mature at par," said State Street spokeswoman Hannah Grove on Monday. "Per the risk factors, we have had very few impairments to the assets." State Street got a $2 billion infusion from the Treasury's Troubled Assets Relief Program in October. Write to Shefali Anand at shefali.anand@wsj.com and Jennifer Levitz at jennifer.levitz@wsj.com