State Street Earnings Jump! (UPDATED STORY)

Someone was saying the other day that for the first time in years there was a risk of being underweight in Equities … Hmmm.  How high can your dead cat bounce?  (Not very!)

Another day,  another part-nationalisation – in this case the Swiss get involved.  It's a good thing the Swiss government doesn't need to hedge these convertible bonds.

State Street had a Q3 earnings call yesterday

I have included below some interesting comments from the Bloomberg report, and some excerpts I have chosen from the SeekingAlpha.com transcript of the call.

Bloomberg:  Securities-finance fees jumped 49 percent to $246 million and asset-management fees declined 13 percent to $266 million.

SeekingAlpha.com Ron Logue, State Street Chairman and CEO:  "None of our funds that support State Street Securities lending business has lost money for our customers. Due primarily to declines in the market, but also suspension or reductions in securities lending by some customers, we have seen assets in our lending program decline by approximately 20%. As a result, we have seen increased withdrawal activity from the collateral pools, but we have been able to manage these outflows in a manner that protects our customers from loss.  The current spreads and volatility are expected to at least partially offset the impact of lower volumes."

There is a clear conflict with the Bloomberg story quoting a Moodys report as saying “Investors are also pulling out of securities-lending programs because of losses by short-term debt funds their collateral is invested in” and the statement by Ron Logue.

My main concern all year has been the potential negative impact on the securities lending business as a result of cash reinvestment losses.  This is the area where the most public losses associated with securities lending have occurred and generated considerable negative sentiment. 

We should be cheered and relieved by State Street’s comments, but I still have a general feeling of discomfort for the wider universe.  Must be the dodgy hot dogs I ate at the Heat/Nets basketball game the other night.

UPDATE:  Thanks to the intrepid reader that spent their time reading State Street's Form 8-K Filing.  There are a number of fascinating comments in the document, and let me point out a couple of them to you:

"For clients that invest directly or indirectly in certain of the collateral pools and seek to terminate participation in lending programs, we have required, in accordance with the applicable client arrangements, that these withdrawals from the collateral pools take the form of in-kind distributions of securities."

"In addition to the impact on the market value of client portfolios, the illiquidity and volatility of both the global fixed-income and equity markets have negatively affected the ability of SSgA to manage client inflows and outflows from other pooled investment vehicles."

That's the kind of thing that worries me.  It also adds some clarity to the letter State Street issued to clients last week.

City Job Losses

I don't even want to talk about jobs however, this too is reality.  Here is the City "If You Think This Year's Bad For Job Cuts, Wait 'Til 2009" .  As usual the Uri Geller of Hedge Fund prognostications, Finbar Taggitt was pretty darn accurate in his guess from over a year ago.   Did I say Uri Geller?  Sorry Finbar, better than that, much better!