Posted by: Aaron Pressman on October 17, 2007
Back at the end of August, the financial world seemed like it might be ending and everyone working on Wall Street or at a hedge fund would soon be out of a job. Rumors flew fast and furious, including one claiming that Boston-based asset manager State Street Corp. (Symbol: STT) was exposed to losses from $22 billion of so-called structured investment vehicles. The Times of London called State Street the most highly exposed of any U.S. or European bank. Turns out you can’t believe everything you read.
State Street reported 3rd quarter results yesterday and top execs held the usual conference call with analysts. The company also went above and beyond by making further disclosures about its balance sheet on its web site, in this PDF file. Turns out that while State Street has set up four large structured finance vehicles worth $29 billion, they’re not much like those set up by Citibank (C) and other Wall Street firms. Virtually all of the assets in the State Street products are rated AAA or AA, versus just one-quarter of assets carrying such high ratings in the products of competitors. Furthermore, none of the conduits has ever suffered losses due to defaults and there’s nary a subprime loan to be found. State Street has offered to back up the conduits if they run into credit problems but even if all of the products were counted on its balance sheet, State Street says it would have an after-tax loss of only $215 million.
Why is State Street’s experience so different from the rest of the Street? One key is the bank’s motivation for establishing the conduits. Most Wall Street firms crammed their offerings full of securities they themselves were selling. It was a quick and easy way to move a ton of products, products that turned out to be not so great for the bottom line. But State Street wasn’t originating weird mortgage-backed securities. Instead, it established its conduits to serve its money market mutual fund customers in need of high-quality, short-term securities. State Street’s conduit’s bought all of their holdings on the open market, selectively choosing good stuff, as noted above. The bank’s best customers would be buying the short-term securities issued by the conduits, so it had to be especially careful. That’s the opposite of the typical Wall Street approach.
Jim Cramer contrasted the recent admissions by State Street and Citi, concluding:
In the ultimate collision of the strong controls/strong business vs. weak controls/weak business drama, State Street included a great chart — available on the Web — that showed its exposure in these structured partnerships vs. a composite that included Citigroup. It was laughable. One was pro, the other bush.
Bush, indeed. And, by the way, if you bought State Street shares after the August 28 bad publicity, you’ve gained 10% in a month and a half.