Saturday, January 17, 2009

State Street loses $5.5 billion

State Street didn't bother with a press release on the long holiday weekend; they just released this news through SEC filings:

They needed to update their risk disclosures because:

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.

So State Street was pretending that their NAV in their cash collateral pools was $1.00 per unit, when in fact the truth was this:

At December 31, 2008, the net asset value based upon market value of our unregistered cash collateral pools ranged from $0.908 to $1.00, with the average weighted net asset value on such date being $0.955.

This news also came out:

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.

Other than temporarily impaired? How long is temporary? Remember our Government gave State Street $2 billion under the TARP. How are State Street's securities doing that they are holding? I'll let the SEC filing speak for itself:

As of December 31, 2008, there were $5.5 billion of after-tax net unrealized losses associated with our portfolio of investment securities available for sale and held to maturity.

How are these securities priced that State Street is down $5.5 billion on?

We must apply significant judgment to assign fair values to our assets, and we may not be able to obtain these values, or any value, if these assets were sold.

How much of this $5.5 billion loss did State Street recognize?

In the fourth quarter of 2008, we recognized a $78 million charge to earnings as a result of other-than-temporary impairment determinations.

Now how did State Street come up with the value of $5.5 billion? Remember every TARP transaction is just designed to plug a hole in the dike with their fingers. State Street received $2 billion, so their loss goes up by more than the money they received! In December of 2007, they had an unrealized loss (of course it was temporary in State Street's judgement) of $678 million. At the end of Q3, they had an unrealized loss (of course it was temporary in State Street's judgement) of $3.19 billion. Now State Street's unrealized loss (of course it is temporary in State Street's judgement) is $5.5 billion!

Now State Street, which we found, can't be trusted in their cash collateral pools, or the valuation they give to their Level 2 or Level 3 assets, also has over $900 billion worth of derivatives outstanding, which I'll let just speak for itself. Remember State Street lost more than a few hundred million on paper they had with Lehman Brothers, meaning that the custodian of our stocks, wouldn't know good paper from bad until the whole world knows.

Maybe their latest tricks will awaken shareholders that it may be in their best interest to sell their shares in State Street. There is only one street called straight and that is Damascus.

And the Lord said unto him, Arise, and go into the street which is called Straight. Acts 9:11

But if you think this story is just coming out now, think again. Look at this piece on State Street that I wrote on October 11.

In regard to their security lending program, State Street then said, "We have not experienced any losses..." So they were lying. They were experiencing losses, but they just weren't telling anybody!

And unlike Saul, I don't see State Street having a conversion worth talking about anytime soon!

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