State Street Corp has not entirely side-stepped the travails facing its rivals on New York's Wall Street. The WSJ reports that "potential losses in key areas" are threatening to pull the Boston-based bank into "the mire with so many others." Among the bad news: the bank has failed to maintain the dollar unit price in its cash collateral pools.

The cash collateral pools are not registered with the SEC and are not money market funds.

The report comes as State Street is due to release its fourth quarter earnings this morning. Analysts expect it to earn as much as $1 per share compared to 57 cents in last year's fourth quarter.

The earning picture is clouded by an SEC filing State Street officials made on Friday.

However, the filing provided insight into the business, including that it took a $450 million write-down in its portfolio of stable value funds. It added that State Street has $5.5 billion of unrealized losses in its conservative fixed income portfolio and another $3.6 billion in losses in its portfolio of conduits.

The report modifications are not a surprise as institutional investors in State Street's fixed income and stable value products have already filed suit against the bank (see MFWire, 8/21/2008).

There is no evidence that State Street will be unable to pay off the funds at par and the bank said it believes the securities will mature at full value.

Still, the filing implied that State Street faces reputational risk and the possibility of lawsuits due to its fixed income potential. The language modifying its risk disclosures included:

We may be exposed to customer claims, financial loss, reputational damage and regulatory scrutiny as a result of transacting purchases and redemptions relating to the unregistered cash collateral pools underlying our securities lending program at a net asset value of $1.00 per unit rather than a lower net asset value based upon market value of the underlying portfolios; and as part of its "risk factors" section:

If all or a significant portion of the unrealized losses in our portfolio of investment securities were determined to be other-than-temporarily impaired, we would recognize a material charge to our earnings and our capital ratios would be adversely impacted

More details of State Street's fourth quarter results should be provided after the company releases its earnings report and discusses those results with stock analysts. 

Edited by: Sean Hanna, Editor in Chief


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