State Street's statement

Boston's State Street Corporation is one of the biggest--and oldest--providers of mutual fund and pension processing and asset-custody services in the United States.  State Street, which operates under the legal name of State Street Bank and Trust Company, offers products and services that span investment research, management, trading services and investment servicing, and are available to large-scale institutional investors and corporations.  The firm ranks as the largest servicer of U.S. pension plans and investment manager of institutional assets worldwide, as well as the No. 1 provider of U.S. mutual fund custody and accounting services.  State Street employs more than 28,000 employees in offices in more than 27 countries.  Its units include State Street Global Advisors, which performs asset management services for the company; Street Alternative Investment Solutions, which combines hedge funds, private equity and alternative risk products; and Boston Financial Data Services--a joint venture with DST Systems--which provides shareholder services to clients.

A penny saved

State Street has been saving, earning and investing pennies since 1792 when Massachusetts Governor John Hancock approved the charter for the Union Bank, State Street's oldest ancestor bank.  In 1925, the Union Bank merged with the State Street Trust Company, which only a year earlier had become custodian of the first U.S. mutual fund.  By the 1970s, State Street had long become a household name and began expanding its operations abroad.  In 1970, State Street's first international office was opened in Munich, followed by a London office in 1972.  By the mid-1980s, under the direction of chief executive William Edgerly, State Street narrowed its focus on servicing financial assets for institutional investors and transformed itself from a regional retail bank to an international financial services provider.

State Street kept on earning pennies right through its 200th year.  In 1991, State Street's assets under custody surpassed $1 trillion, and in 1992, assets under management reached $100 billion.  The reconfiguring and focus on institutional asset management also continued.  In 1996, State Street acquired Princeton Financial Systems for its industry-leading PAM family of portfolio management and accounting systems, while selling off its retail and commercial banking services to Citizens Bank a few years later in 1999.  In 2003, Deutsche Bank's Global Securities Services businesses were acquired for $1.5 billion.  At the time, Deutsche Bank's Global Securities Services unit was the world's fifth-largest custodian in terms of assets.  The acquisition included not only 3,000 Deutsche Bank employees around the world, but also a broader global client base and an entryway into high-growth European markets.  Previously, non-U.S. State Street clients held only 12 percent of the firm's assets under custody.

New deal

In July 2007, State Street completed its acquisition of Boston's Investors Financial Services Corp. for nearly $4.5 billion in stocks, leaving the firm with more than $15 trillion in assets under custody.  In sealing the deal, State Street became the leading investment service provider to off-shore and hedge-fund industries.  State Street insiders said they were confident that the acquisition would deliver value for shareholders, customers and employees.  The company expected the conversion for new customers to be completed within 18 months.  Integration and restructuring costs are expected to be an estimated $650 million for State Street, and the company says the acquisition of Investors won't boost its profits until 2009.  Investors went public in 1995 and had $1.95 trillion in assets under administration at the time of the deal announcement.

Down a dark street

As 2008 began, State Street faced a legal challenge from five clients who claimed to have lost millions of dollars in investments that they said were told would be low-risk.  The firm announced that because it had reserved $618 million for the legal fees associated with the case, a $279-million charge will be taken in the fourth quarter of 2007.  In addition to this loss, State Street also closed several of its funds and laid off some junior employees as a result of the reserve.  The firm's misfortune didn't stop there.  On January 3, the chief executive of State Street's investment unit, William Hunt, stepped down (supplanted by interim head James Phalen).  Though the news brought a pessimistic outlook from some analysts, the firm insisted that it would continue to fight.  CEO Ronald Logue said in a conference call that State Street was prepared to shield itself from "inappropriate claims" in future lawsuits, adding that the firm is "confident that we have identified and are managing the known liquidity risks throughout our company."

Latest results get mixed reviews

For the first quarter of 2008, State Street recorded $530 million in net income, a 69-percent increase versus the previous year's first quarter.  The firm also saw a 54-percent rise in revenue to $2.6 billion.  With such large increases versus the previous year, it would seem as if the firm had a lot to celebrate.  However, at a closer glance, the numbers weren't as impressive.  Thomas McCrohan, an analyst at Janney Montgomery Scott, told Forbes, "When you peel the onion you see that [State Street's] core business is suffering, and the asset-management arm is being affected by reputation issues."  Forbes added that "the company's capital levels are being eroded by the global credit crunch that arose from the U.S. subprime crisis."  Indeed, in April 2008, State Street Chief Financial Officer Ed Resch said in an earnings conference call that the firm had suffered a loss of $3.2 billion on its portfolio and a $2.5 billion loss on conduits.  By September 30, 2009, however, the numbers were relatively unscathed by the crisis, incurring $17.9 trillion in assets under custody and administration and $1.7 trillion in assets under management.  Despite these figures, the company keeps expectations low for 2009, stating that it expects its operating revenue to decrease by 16 percent compared to the previous year's record.