Saturday, October 11, 2008

State Street freezes withdrawals

In the latest sign of the tightening squeeze on securities lending, the investment-management unit of State Street Corp. is restricting the ability of investors to withdraw money from such loan funds.

State Street Global Advisors told clients in a letter this week that they wouldn't be allowed to pull out money all at once from the firm's securities-lending funds. State Street offers at least four of those funds, which loan the securities of investors and then manage cash collateral received in exchange for the securities. The funds invest in various short-term instruments.

Why are they lending out these shares to shortsellers for anyway when the market is collapsing?

Clients who want to cash out of the securities-lending funds still can do so, but a portion of their money now will be parked in a separate investment pool run by State Street.

What's in that pool? Why can't that pool be cashed out? So you can't get your money, but you can move your money into another pool? If you can move your money in another pool, why can't you get it out?

"Our securities-lending program remains strong," a spokeswoman for the Boston company said. "We have not experienced any losses, and there are no restrictions on normal course transactions within the lending funds."

It's so strong you can't get your money back!

Northern Trust Corp. and Bank of New York Mellon Corp. also have imposed restrictions on securities lending funds.

And they had after tax charges of $94 million and $425 million in their programs, meaning that they lost over $700 million in this security lending program.

The restrictions underscore the continuing scramble by firms with securities-lending programs to head off any potential wave of redemptions being fueled by the frozen credit markets. Securities-lending programs are widely used by pension funds, endowments, index-fund managers and other large investors as a way of squeezing extra income out of a large stock or bond portfolio. Short sellers are among the biggest borrowers of shares.

But roiled markets have turned what had long been reliable gains from loaning shares into losses. As a result, firms that facilitate securities lending "are putting people on notice that they want to discourage any run on the fund," said Jim Meynard, executive director for the Georgia Firefighters Pension Fund, which is a client of State Street's securities-lending program.

Some pension funds are taking steps on their own to defuse the risks associated with securities lending. Bill Atwood, executive director at the Illinois State Board of Investment, which has about $1.6 billion in State Street's securities-lending program, is shifting those assets into a more conservative State Street collateral fund that invests in government securities or overnight corporate paper.

State Street juices it's earnings by facilitating shortsellers.

Another sacred cow, State Street (STT 64.75) was down $7 today. One of their big sources of income is facilitating short selling. From their latest 10Q:

The increase in securities finance revenue was primarily driven by wider average credit spreads, which were partly offset by lower volumes of securities on loan.

How much did their securities finance revenue grow last quarter? 117% to 352 million. They made more here than with management fees!

Besides being the nation's custodian, they have a junk asset backed portfolio in the twenty of billions of dollars, and they have $75 billion of Level 2 and 3 assets, and they have a $28 billion SIV with garbage in it.

State Street also loaded up their funds that they managed in ERISA plans with mortgage backed securities, and blew up their bond funds that they called "enhanced cash." Now it's a lawsuit.

Why would they load up with mortgages? Some say they bought Wall Street's junk as kickback. But wouldn't that be against the law?

How ironic then, is it, that both State Street and Goldman Sachs, who were both chosen to help administer the $700 billion bail-out bill, both profited handsomely from facilitating shortsellers, are now under the shortseller's microscope?

But I just don't think "they" can crack them.

Because both State Street, and Goldman Sachs, are where the Government's secrets lie!

Unless those doing the shorting are those who want this Government to crack. It might make a better novel, than a trade.

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