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.