8-KOther EventsExhibits & Filings

STATE STREET CORP 8-K Report, Corporate Update (Jun 2, 2008)

Filed June 2, 2008For Securities:STTSTT-PG

Summary

This Form 8-K filing by State Street Corporation (STT) on June 2, 2008, primarily serves to update and elaborate on the company's risk factor disclosures, particularly in light of prevailing market conditions. Key areas of focus include liquidity risk related to State Street Global Advisors' (SSgA) accounts managed with wrap provider arrangements, operational risks concerning confidential information, and regulatory/legal/accounting/tax risks. The filing also provides updated capital ratio information as of March 31, 2008, and references additional details on the company's investment portfolio and asset-backed commercial paper (ABCP) conduits. The overarching theme is the heightened awareness and disclosure of risks, especially those stemming from the volatile financial markets of 2008. State Street emphasizes the potential impact of market downturns, credit deterioration, and liquidity constraints on its various business segments, including its asset management and custody services. The company also addresses specific concerns, such as the legal exposure related to certain SSgA active fixed-income strategies and the potential consolidation of ABCP conduits onto its balance sheet.

Key Highlights

  • 1State Street is updating its risk factor disclosures, emphasizing liquidity, operational, and regulatory/legal/accounting/tax risks due to market conditions.
  • 2The filing details risks associated with SSgA's accounts managed with 'wrap providers,' highlighting potential shortfalls and market value vs. book value discrepancies.
  • 3State Street addresses the potential consolidation of its asset-backed commercial paper (ABCP) conduits onto its balance sheet, noting a $1.49 billion after-tax unrealized loss on conduit assets as of March 31, 2008.
  • 4The company reports that it was required to purchase $850 million of ABCP conduit assets in Q1 2008 due to liquidity needs, resulting in a $12 million reduction in processing fees and other revenue.
  • 5Updated capital ratios as of March 31, 2008, are provided: Tier 1 leverage ratio at 6.1%, Tier 1 risk-based capital ratio at 12.4%, Total risk-based capital ratio at 13.8%, and Tangible common equity to tangible assets (TCE/TA) at 2.9%.
  • 6A reserve was established for legal exposure and costs related to certain SSgA active fixed-income strategies, with approximately $275 million expended as of March 31, 2008, including support for wrapped accounts.
  • 7The company is facing a potential loss of a wrap provider and is seeking a replacement, noting limited alternatives and the risk of further market value deterioration impacting these accounts.

Frequently Asked Questions

The primary purpose of this 8-K filing is to update and expand upon State Street Corporation's risk factor disclosures, particularly concerning liquidity, operational, and regulatory risks, in response to the challenging financial market conditions prevalent in 2008. It also provides updated capital ratio information and details regarding its investment portfolio and asset-backed commercial paper conduits.

State Street is concerned about the potential need to consolidate its ABCP conduits onto its balance sheet, which could significantly increase its assets and liabilities. As of March 31, 2008, these conduits had $1.49 billion in after-tax unrealized losses. The company was also required to purchase $850 million in conduit assets during the first quarter of 2008 due to liquidity issues, impacting its revenue.

SSgA faces risks related to its actively managed fixed-income strategies, which have experienced underperformance due to exposure to sub-prime mortgages, leading to litigation and regulatory inquiries. Additionally, SSgA manages accounts with 'wrap providers' that are subject to market volatility, causing a discrepancy between asset market value and book value, and has one wrap provider exiting the business, creating replacement uncertainty.

State Street has established a reserve to cover estimated legal exposures and related costs associated with certain SSgA active fixed-income strategies. As of March 31, 2008, approximately $275 million had been expended from this reserve, including amounts used to support certain accounts managed by SSgA that benefit from contractual arrangements with 'wrap providers'. The company is also conducting a review of its operational, risk, and compliance infrastructure across SSgA's product line.