UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report
(Date of earliest event reported):
June 2, 2008
State Street Corporation
(Exact name of registrant as specified in its charter)
Massachusetts
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001-07511
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04-2456637
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(State of
Incorporation)
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(Commission File
Number)
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(IRS Employer
Identification Number)
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One
Lincoln Street, Boston, Massachusetts
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02111
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(Address of principal
executive offices)
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(Zip code)
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Registrants
telephone number, including area code:
(617) 786-3000
Check the appropriate box
below if the Form 8-K filing is intended to simultaneously satisfy the
filing obligation of the registrant under any of the following provisions:
o
Written communications pursuant to Rule 425
under the Securities Act
o
Soliciting material pursuant to Rule 14a-12
under the Exchange Act
o
Pre-commencement communications pursuant to
Rule 14d-2(b) under the Exchange Act
o
Pre-commencement communications pursuant to
Rule 13e-4(c) under the Exchange Act
Item 8.01.
Other
Events
We are filing this
current report on Form 8-K for the purposes of (1) updating our risk factor
disclosures, in particular the disclosures (a) under the heading Liquidity
Risk, concerning accounts managed by State Street Global Advisors, or SSgA,
that have the benefit of contractual arrangements with third-party financial
institutions known as wrap providers, (b) under the heading Operational Risk,
concerning the maintenance of confidential information; and (c) under the
heading Regulatory/Legal/Accounting/Tax Risk concerning legal actions,
regulatory matters and tax matters, (2) filing certain capital ratio
information and (3) filing certain information concerning State Streets
investment portfolio and asset-backed commercial paper conduits.
Unless otherwise
indicated or unless the context requires otherwise, all references in this
Current Report on Form 8-K to State Street, we, us, our, or similar
terms means State Street Corporation and its subsidiaries on a consolidated
basis.
Risk
Factors
This Form 8-K and other reports filed by us under the Securities
Exchange Act of 1934 or registration statements under the Securities Act of 1933
contains statements that are considered forward-looking statements within the
meaning of United States securities laws. In addition, State Street and its
management may make other written or oral communications from time to time that
contain forward-looking statements. Forward-looking statements, including
statements about industry trends, managements future expectations and other
matters that do not relate strictly to historical facts, are based on
assumptions by management, and are often identified by such forward-looking
terminology as expect, look, believe, anticipate, estimate, seek, may,
will, trend, target and goal, or similar statements or variations of
such terms. Forward-looking statements may include, among other things,
statements about State Streets confidence in its strategies and its
expectations about financial performance, market growth, acquisitions and
divestitures, new technologies, services and opportunities and earnings.
Forward-looking statements are subject to various risks and
uncertainties, which change over time, are based on managements expectations
and assumptions at the time the statements are made, and are not guarantees of
future results. Managements expectations and assumptions, and the continued validity
of the forward-looking statements, are subject to change due to a broad range
of factors affecting the national and global economies, the equity, debt,
currency and other financial markets, as well as factors specific to State
Street and its subsidiaries, including State Street Bank. Factors that could
cause changes in the expectations or assumptions on which forward-looking
statements are based include, but are not limited to:
·
our ability to integrate acquisitions into
our business, including the acquisition of Investors Financial Services Corp. (Investors
Financial);
·
the level and volatility of interest rates,
particularly in the U.S., Europe and the Asia/Pacific region; the performance
and volatility of securities, currency and other markets in the U.S. and
internationally; and economic conditions and monetary and other governmental
actions designed to address those conditions;
2
·
the liquidity of the U.S. and international
securities markets, particularly the markets for fixed-income securities,
including asset-backed commercial paper, and the liquidity requirements of our
customers;
·
our ability to measure the fair value of securities
in our investment securities portfolio, particularly given current market
conditions for many of these securities;
·
the credit quality and credit agency ratings
of the securities in our investment securities portfolio, a deterioration or
downgrade of which could lead to other-than-temporary impairment of the
respective securities and the recognition of an impairment loss;
·
our ability to attract non-interest bearing
deposits and other low-cost funds;
·
the possibility that changes in market conditions
or asset performance may require any off-balance sheet activities, including
our asset-backed commercial paper conduits, to be consolidated into our
financial statements, requiring the recognition of associated losses, if any;
·
the results of litigation and similar
disputes and, in particular, the effect that current or potential litigation
may have on our reputation and SSgAs reputation, and our ability to attract
and retain customers; and the possibility that the ultimate costs of the
legal exposure associated with certain of SSgAs actively managed fixed-income
strategies may exceed or be below the level of the related reserve, in view of the uncertainties of the timing and
outcome of litigation, and the amounts involved;
·
the possibility of further developments of
the nature that previously gave rise to the legal exposure associated with
certain of SSgAs actively managed fixed-income and other investment
strategies;
·
the performance and demand for the products
and services we offer;
·
the competitive environment in which we
operate;
·
the enactment of legislation and changes in
regulation and enforcement that impact us and our customers, as well as the
effects of legal and regulatory proceedings, including litigation;
·
our ability to continue to grow revenue,
control expenses and attract the capital necessary to achieve our business
goals and comply with regulatory requirements;
·
our ability to manage systemic risks and
control operating risks;
·
our ability to obtain quality and timely
services from third parties with which we contract;
3
·
trends in the globalization of investment
activity and the growth on a worldwide basis in financial assets;
·
trends in governmental and corporate pension
plans and savings rates;
·
changes in accounting standards and
practices, including changes in the interpretation of existing standards, that
impact our consolidated financial statements; and
·
changes in tax legislation and in the
interpretation of existing tax laws by U.S. and non-U.S. tax authorities that
impact the amount of taxes due.
Therefore, actual outcomes and results may differ materially from what
is expressed in our forward-looking statements and from our historical
financial results due to the factors discussed above, below and elsewhere in
this Form 8-K or disclosed in our other Securities and Exchange
Commission, or SEC, filings.
Forward-looking statements should not be relied upon as representing our
expectations or beliefs as of any date subsequent to the date this Form 8-K
is filed with the SEC. State Street undertakes no obligation to revise the
forward-looking statements contained in this Form 8-K to reflect events
after the date it is filed with the SEC. The factors discussed above are not
intended to be a complete summary of all risks and uncertainties that may
affect our businesses. Though we strive to monitor and mitigate risk, we cannot
anticipate all potential economic, operational and financial developments that
may adversely impact our operations and our financial results.
Forward-looking statements should not be viewed as predictions, and
should not be the primary basis upon which investors evaluate State Street. Any
investor in State Street should consider all risks and uncertainties disclosed
in our SEC filings, including our filings under the Securities Exchange Act of
1934, including our reports on Form 10-K, Form 10-Q and Form 8-K,
or registration statements under the Securities Act of 1933, all of which are
accessible on the SECs website at
www.sec.gov
or on our website at
www.statestreet.com
.
Business Conditions/Economic Risk
Our businesses are affected by global economic conditions, political
uncertainties and volatility and other developments in the financial markets.
Factors such as interest rates and commodities prices, regional and
international rates of economic growth, inflation, political instability, the
liquidity and volatility of fixed-income, equity, credit, currency, derivative
and other financial markets, and investor confidence can significantly affect
the financial markets in which we and our customers are engaged. Such factors
have affected, and may further unfavorably affect, both regional and worldwide
economic growth, creating adverse effects on many companies, including us, in
ways that are not predictable or that we may fail to anticipate.
A significant market downturn may lead to a decline in the value of
assets under management and custody, which could reduce our asset-based fee
revenue and may adversely impact other transaction-based revenue, such as
securities finance revenue, and the volume of transactions that we execute for
our customers. This market downturn could be accompanied by a widening of
credit spreads or credit deterioration, which could reduce the value of
securities we hold in our investment portfolio. The assets held by our
asset-backed commercial paper conduits
4
can be
similarly affected. In addition, lower market volatility, even in a generally
rising market environment, may reduce trading volumes of our customers, and our
ability to achieve attractive spreads, which could lead to lower trading
revenues. Our revenues, particularly our trading revenues, may increase or
decrease depending upon the extent of increases or decreases in cross-border
investments made by our customers. The level of cross-border activity can be
influenced by a number of factors, including geopolitical instabilities and
customer mix. General market downturns would also likely lead to a decline in
the volume of transactions we execute on behalf of our customers, decreasing
our fee and revenue opportunities and reducing the level of assets under
management and custody. Market performance and volatility may also influence
the revenue that we receive from off-balance sheet activities.
In addition, revenues during a calendar year, driven by the products
and services we provide, can fluctuate commensurate with the normal course of
business activity of our customers and market conditions, and may provide
volatility to our earnings from quarter to quarter.
In recent years, investment manager and hedge fund manager operations
outsourcing and non-U.S. asset servicing have been areas of rapid growth in our
business. If the demand for these types of services were to decline, we could
see a slowdown in the growth rate of our revenue.
Strategic/Competition Risk
We expect the markets in which we operate to remain both highly
competitive and global across all facets of our business, resulting in
increases in both regional and global competitive risks. We have experienced,
and anticipate that we will continue to experience, pricing pressure in many of
our core businesses. Many of our businesses compete with other domestic and
international banks and financial services companies, such as custody banks,
investment advisors, broker/dealers, outsourcing companies and data processing
companies. Many of our competitors, including our competitors in core services,
have substantially greater capital resources. In some of our businesses, we are
service providers to significant competitors. These competitors are in some
instances significant customers, and the retention of these customers involves
additional risks, such as the avoidance of actual or perceived conflicts of
interest and the maintenance of high levels of service quality. The ability of
a competitor to offer comparable or improved products or services at a lower
price would likely negatively affect our ability to maintain or increase our
profitability. Many of our core services are subject to contracts that have
relatively short terms or may be terminated by our customer after a short
notice period. In addition, pricing pressures as a result of the activities of
competitors, customer pricing reviews, and rebids, as well as the introduction
of new products, may result in a reduction in the prices we can charge for our
products and services.
Our strategy for growth depends upon both attracting new customers and
cross-selling additional products and services to our existing customer base.
To the extent that we are not able to achieve these goals, we may not be able
to attain our financial goals. Substantial risks and uncertainties are
associated with the introduction of new products and services, including
technical and control requirements that may need to be developed and
implemented to offer such products while also managing associated risks. The
introduction of new products and services can also entail significant time and
resources. Regulatory and internal control requirements,
5
capital
requirements, competitive alternatives and shifting market preferences may also
determine if such initiatives can be brought to market in a manner that is
timely and attractive to our customers. Failure to successfully manage these
risks in the development and implementation of new products or services could
have a material adverse effect on our business, as well as our results of
operations and financial condition.
Our financial performance depends, in part, on our ability to develop
and market new and innovative services and to adopt or develop new technologies
that differentiate our products or provide cost efficiencies, while avoiding
increased related expenses. The risks we face include rapid technological
change in the industry, our ability to access technical and other information
from our customers, and the significant and ongoing investments required to bring
new products and services to market in a timely manner at competitive prices.
Our proactive cross-selling of multiple products and services to our customers
can exacerbate the negative financial effects associated with the risk of loss
of any one customer. Developments in the securities processing industry,
including shortened settlement cycles and straight-through processing, have
required continued internal procedural enhancements and further technology
investment.
Acquisitions of complementary businesses and technologies, development
of strategic alliances and divestitures of portions of our business, in
addition to fostering organic growth opportunities, are an active part of our
overall business strategy to remain competitive. We may not be able to effectively
assimilate services, technologies, key personnel or businesses of acquired
companies into our business or service offerings, alliances may not be
successful, and we may not achieve related revenue growth or cost savings. In
addition, we may not be able to successfully manage the divestiture of
identified businesses on satisfactory terms, if at all, and this would reduce
anticipated benefits to earnings. Ongoing consolidation within the financial
services industry could pose challenges in the markets we serve.
Acquisitions present risks that differ from the risks associated with
our ongoing operations. Our financial results for 2008 and for the next few
years may be significantly impacted by our ability to achieve the cost savings
and other benefits that we anticipate as a result of the acquisition of
Investors Financial in 2007, as well as our ability to retain its customer base
and to successfully cross-sell our products and services to its customers.
These cost savings and customer retention goals will be significantly
influenced by our ability to convert former Investors Financial customers onto
State Street systems in a timely manner and to maintain the level of customer
service such customers received from Investors Financial. Future acquisitions
may present similar integration, cost savings and customer retention
challenges.
Intellectual property of an acquired business, such as Currenex, Inc.,
acquired in 2007, may be an important component of the value that we agree to
pay for such a business; however, these types of acquisitions entail the risk
that the acquired business does not own the intellectual property that we
believe we are acquiring, that the intellectual property is dependent upon
licenses from third parties, that the acquired business infringes upon the
intellectual property rights of others, or that the technology does not have
the acceptance in the marketplace that we anticipated. Acquisitions of
investment servicing businesses such as Investors Financial normally entail
information technology systems conversions, which involve operational risks and
may result in customer dissatisfaction and defection. Customers of businesses
that we acquire, including, in the case of Investors Financial, its largest
customer, are competitors of our non-
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custody
businesses. The loss of some of these customers or a significant reduction in
revenues generated from them, for competitive or other reasons, would adversely
affect the benefits that we expect to achieve from the acquisition.
Our ability to acquire other entities that provide our core services to
achieve greater economies of scale or to expand our product offering is
dependent upon our financial resources and our ability to access the capital
markets. Due to company-specific issues or lack of liquidity in the capital
markets, our ability to continue to expand through acquisitions or to dispose
of businesses that no longer are strategic to us may be adversely affected.
In connection with most acquisitions, before the acquisition can be
completed, we must obtain various regulatory approvals or consents, which may
include approvals of the Federal Reserve Board, the Massachusetts Commissioner
of Banks and other domestic and foreign regulatory authorities. These
regulatory authorities may impose conditions on the completion of the acquisition
or require changes to its terms. Any such conditions, or any associated
regulatory delays, could limit the benefits of the transaction.
With any acquisition, the integration of the operations and resources
of the businesses could result in the loss of key employees, the disruption of
our and the acquired companys ongoing businesses, or inconsistencies in
standards, controls, procedures and policies that could adversely affect our
ability to maintain relationships with customers and employees or to achieve
the anticipated benefits of the acquisition. Integration efforts may also
divert management attention and resources. The acquisition and combination of a
business with our operations may also expose us to risks from unknown or
contingent liabilities with respect to which we may have no recourse against
the seller. While we normally seek to mitigate that risk through
pre-acquisition due diligence, increasingly acquisition transactions are
competitive auctions in which we have limited time and access to information to
evaluate the risks inherent in the business being acquired, and no or limited
recourse against the seller if undisclosed liabilities are discovered after we
enter into a definitive agreement.
We may not achieve the benefits we sought in an acquisition, or, if
achieved, those benefits may be achieved later than we anticipated. Failure to
achieve anticipated benefits from an acquisition could result in increased
costs and lower revenues than expected of the combined company. In addition, if
the financial performance associated with an acquisition falls short of
expectations, it may result in impairment charges associated with the goodwill
or other intangible assets recorded as part of the acquisition.
Liquidity Risk
The management of liquidity risk is critical to the management of our
consolidated balance sheet and to our ability to service our customer base. In
managing our consolidated balance sheet, our primary source of funding is
customer deposits. These deposits are predominantly short-term,
transaction-based deposits by institutional investors. Our ability to continue
to attract these deposits, and other funding sources such as certificates of
deposit and commercial paper, is subject to variability based upon a number of
factors, including volume and volatility in the global securities markets, our
credit rating and the relative interest rates that we are prepared to pay for
these liabilities.
7
In managing our consolidated balance sheet,
we also depend on access to global capital markets to provide us with
sufficient capital resources and liquidity to meet our commitments and business
needs, and to accommodate the transaction and cash management needs of our
customers. Other sources of funding available to us, and upon which we rely as
regular components of our liquidity risk management strategy, include
inter-bank borrowings, repurchase agreements and borrowings from the Federal
Reserve discount window, or comparable non-U.S. central banking sources. Any
occurrence that may limit our access to the capital markets, such as a decline
in the confidence of our corporate debt or equity purchasers, or a downgrade of
any of our credit ratings, may adversely affect our capital costs and our
ability to raise capital and, in turn, our liquidity. Similarly, the failure to
maintain acceptable credit ratings may preclude us from being competitive in
certain products. General market disruptions, natural disasters or operational
problems may affect either third parties or us, and can also have an adverse
affect on our liquidity. We generally use our sources of funds to invest
in a portfolio of investment securities and to maintain the liquidity necessary
to extend credit to our customers. These funds are invested in a variety of
assets ranging from short-term interest-bearing deposits with banks to
longer-maturity investment securities. While we have historically maintained
our investment portfolio at a relatively short duration with respect to
interest-rate risk, the average maturity of the investment portfolio is
significantly longer than the contractual maturity of our deposit base. In
addition, as part of our custody business, we provide overdraft financing to
our customers, and liquidity lines to third-party commercial paper conduits and
mutual funds, as well as more traditional extensions of credit. The demand for
credit is difficult to forecast and control, and may be at its peak at times of
dislocation in the securities markets, potentially compounding liquidity
issues.
In a period of financial disruption, or if
negative developments occurred with respect to State Street, the availability
and cost of our funding sources could be adversely affected. In that event, our
cost of funds may increase, thereby reducing our net interest revenue, or we
may need to dispose of a portion of our investment portfolio, which, depending
upon market conditions, could result in our realizing a loss or experiencing
other adverse accounting consequences upon those dispositions. Our efforts to
monitor and manage liquidity risk may not be successful or sufficient to deal
with dramatic or unanticipated changes in the global securities markets or
other State Street or market event-driven reductions in liquidity.
At March 31, 2008, including the effect
of master netting agreements, approximately $78.28 billion of our
consolidated total assets and approximately $9.10 billion of our
consolidated total liabilities were carried at fair value. Of the total assets
carried at fair value, approximately $68.01 billion consisted of
investment securities available for sale, with the remainder primarily composed
of derivative instruments. More than 90% of the available-for-sale securities and
substantially all of the derivative instruments were categorized in
level 2 of the valuation hierarchy (meaning that their fair value was
determined by reference to quoted prices for similar assets or liabilities or
other observable inputs), with the remaining amounts categorized in
level 3 (meaning that their fair value was determined by reference to
inputs that are unobservable in the market and therefore require a greater
degree of management judgment). Excluding the effect of master netting
agreements, the fair value of level 3 assets at March 31, 2008 was
$6.97 billion, or 8.5% of total assets carried at fair value, and the fair
value of level 3 liabilities was $656 million, or 5% of total
liabilities carried at fair value. The determination of
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fair value for securities categorized in level 2 or 3
involves significant judgment due to the complexity of factors contributing to
the valuation, many of which are not readily observable in the market. In addition,
we have historically placed a high level of reliance on information obtained
from third-party sources to measure fair values. Third-party sources also use
assumptions, judgments and estimates in determining securities values, and
different third parties may provide different prices for securities. Moreover,
depending upon, among other things, the measurement date of the security, the
subsequent sale price of the security may be different from its recorded fair
value. These differences may be significant especially if the security is sold
during a period of illiquidity or market disruption or as part of a large block
of securities under a forced transaction. See note 9, Fair Value
Measurements, to the consolidated financial statements included in our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2008 for a more
detailed discussion of the criteria used to categorize securities in
level 1, 2 or 3 of the valuation hierarchy.
As of March 31, 2008, in connection with
managements measurements of fair value referenced above, there were
$3.16 billion of pre-tax net unrealized losses associated with our
investment securities portfolio. When the fair value of a security declines,
management must assess whether that decline is other-than-temporary. When the
decline in fair value is deemed an other-than-temporary impairment, the
amortized cost basis of the investment security is reduced to its then current
fair value through a charge to earnings. The review of whether a decline in
fair value is other-than-temporary considers numerous factors such as: adverse
situations that might affect the ability to fully collect interest and
principal; the credit quality and performance of any underlying collateral and
guarantees; the length of time the amortized cost has exceeded the fair value
and the severity of this impairment relative to the securitys amortized cost
basis; external credit ratings and current developments with respect to the
security; managements intent and ability to hold the security until recovery
in market value; managements assessment of current market conditions and
future expectations; and current and expected future interest rates. Many of
these factors involve significant judgment. If all or a significant portion of
this unrealized loss were determined to be other-than-temporary impairment, we
would recognize a material charge to earnings in the quarter during which such
determination was made, our capital ratios would be adversely impacted and a
rating agency might downgrade our credit rating or put us on credit watch. A
downgrade or a significant reduction in our capital ratios might adversely
impact our ability to access the capital markets or might increase our cost of
capital.
In our business activities, we assume
liquidity and interest-rate risk in managing longer-term assets or asset pools
for third parties that are funded on a short-term basis, or where the customers
participating in these products may have a right to the return of cash or
assets on limited notice. These business activities include, among others, the
unconsolidated asset-backed commercial paper conduits administered by our
Structured Products group, securities finance collateral pools and money market
and other short-term investment funds.
In the asset-backed commercial paper
conduits, for example, pools of medium- and long-term financial instruments,
principally mortgage- and other asset-backed securities, are financed through
the issuance of short-term commercial paper. The conduits strive to maintain a positive
margin between the rate of return on their longer-term assets and the
short-term cost of funding. This mismatch in the maturity of the investment
pools and funding creates risk if disruptions
9
occur in the liquidity of the short-term debt or asset-backed
securities markets, or if the cost of short-term borrowings exceeds the
conduits rate of return on their investment pools or purchased assets.
In connection with the administration of the
activities of the asset-backed commercial paper conduits, we provide
contractual back-up liquidity to the conduits if they cannot meet their
liquidity needs through the issuance of commercial paper. In the event that
maturing commercial paper cannot be placed by the conduits, we are required by
contract to, among other things, provide liquidity to the conduits by
purchasing portfolio assets from them. During the first quarter of 2008,
pursuant to these contractual obligations, we were required to purchase $850 million
of conduit assets. The securities were purchased at prices determined in
accordance with existing contractual terms of the liquidity asset purchase
agreement, and which exceeded their fair value. Accordingly, the securities
were written down to fair value through a $12 million reduction of
processing fees and other revenue in our consolidated statement of income.
These purchases were funded from our general liquidity, and the assets were
recorded on our consolidated balance sheet. We also provide liquidity by
purchasing commercial paper or providing other extensions of credit to the
conduits. As of April 30, 2008, we held on our consolidated balance sheet
an aggregate of approximately $1.18 billion of commercial paper issued by
the conduits, compared to $292 million as of March 31, 2008 and
$2 million as of December 31, 2007. Our contractual arrangements with
the conduits also require that we purchase conduit portfolio assets under other
circumstances, such as a downgrade of our credit rating.
If circumstances change we may be required,
under existing accounting standards, to consolidate some or all of the
otherwise unconsolidated conduits onto our consolidated balance sheet. In the
event State Street were to consolidate the conduits, there may be a significant
charge reflecting the difference between the book value and the market value of
each of the conduits portfolios. For example, if changes in market conditions
require us to update the assumptions in our expected loss model, we may be
required to increase the amount of first-loss notes in order for the investors
in the first-loss notes to continue to be considered the primary beneficiaries
of the conduits. During the first quarter of 2008, some of the conduits issued
additional first-loss notes totaling $20 million to third parties,
increasing the total first-loss notes outstanding at March 31, 2008 to
$52 million. In various circumstances, including if the conduits are not
able to issue additional first-loss notes or take other actions, we may be determined
to be the primary beneficiary of the conduits, and we would be required to
consolidate the conduits assets and liabilities onto our consolidated balance
sheet. In addition, existing accounting standards may be changed or interpreted
differently in the future in a manner that increases the risk of consolidation
of the conduits.
Consolidation, or the purchase of the assets
of the conduits pursuant to the contractual agreements described above, could
affect the size of our consolidated balance sheet and related funding
requirements, our financial and regulatory capital ratios and, if the conduit
assets include unrealized losses, could require us to recognize those losses.
As of March 31, 2008, these unrealized losses amount to $1.49 billion
after-tax. Because of our contractual agreements to purchase assets from the
conduits under specified conditions, we are also exposed to the credit risks in
the conduits portfolios subject to first-loss coverage. Conditions in the
financial markets that might warrant consolidation of the conduits or the
purchase of assets may also require us to
10
recognize other-than-temporary impairment in our investment portfolio.
The Financial Accounting Standard Board is considering changes to accounting
standards related to off-balance sheet vehicles such as the conduits, and
industry-wide revisions are under discussion that could require us to
consolidate all of the conduits we administer into our financial statements in
the future, possibly as early as January 1, 2009.
If consolidation of the conduits, purchase of
the conduit assets pursuant to contractual arrangements or recognition of
unrealized loss as other-than-temporary impairment were to occur, our capital
ratios would be adversely affected. The degree of the adverse impact would
depend upon many factors including our capital ratios at the time of such
occurrence, the amount of loss realized and management actions, such as raising
capital, that might mitigate the impact of a loss.
We also manage other assets that are funded
in the short-term markets and invested in longer-term markets, including
securities finance collateral pools and money market and other short-term
investment funds. These businesses involve risks inherent in an arbitrage of
funding and investment; however, in these businesses, we primarily act as agent
and do not have the direct principal risk. For example, if a collateral pool or
a money market fund that we manage were to have unexpected liquidity demands
from investors in the pool that exceeded available liquidity, the investment
pool could be required to sell assets to meet those redemption requirements.
During periods of disruption in the credit markets, it may be difficult to sell
the assets held by these pools at a reasonable price. In those circumstances,
the financial loss accrues to the pools investors and not to us.
The credit risks inherent in these portfolios
are attributable to the investors in the investment pools and not to State
Street. These investment pools may have significant exposure to individual
credits. The incurrence of substantial losses in these pools, particularly in
money market funds, could result in significant harm to our reputation and
significantly and adversely affect the prospects of our associated business
units. In some circumstances, we may seek to mitigate that risk by compensating
the investment pools for all or a portion of such losses even though we are not
contractually obligated to do so; however, that would potentially result in the
recognition of significant losses or a greater use of capital than we have
available and could in certain extreme situations require us to consolidate the
investment pools onto our consolidated balance sheet.
SSgA manages certain accounts that have the benefit of contractual
arrangements with third party financial institutions, which allow the accounts
to issue and redeem units based upon the book value of the accounts assets
rather than their market value. The third-party financial institutions, know as
wrap providers, generally have an obligation to fund any shortfall in the
account after all qualified participant withdrawals have been redeemed at a
price based upon the assets book value. As of April 30, 2008, these
accounts had a total book value of $14.6 billion, of which
$10.3 billion is subject to contractual wrap arrangements and
$4.3 billion consists of cash and guaranteed investment contracts. Several
financial institutions currently provide such contractual wrap arrangements.
Securities representing 92.5% of the book value of the $10.3 billion wrapped
portion of these accounts are rated AA or better as of April 30, 2008, and
the average duration of the securities in the accounts was generally
three years or less. Many of these accounts were significantly impacted by
the volatility and lack of liquidity in the fixed-income securities markets
beginning in the second half of 2007 and experienced a variance between market
and book values greater than that
11
experienced in
more liquid markets. As contemplated when we established the reserve in
connection with SSgAs active fixed-income strategies, we used $160 million of
the reserve to decrease the difference between the market and book values of
the wrapped portion of these accounts, and in part as a result of this action,
the average market-to-book-value ratio of the wrapped portion of these accounts
on January 31, 2008 increased to 96.77% from 93.43% on December 26,
2007.
The volatility and illiquidity in the fixed-income securities markets
during 2008 continue to impact the assets held by these accounts and have
further reduced their market values. As of April 30, 2008, the average
market-to-book-value ratio on the wrapped portion of these accounts was
approximately 94.1%. This deficiency, or a further deterioration in the
market-to-book-value ratio, could lead one or more wrap providers to
discontinue their relationship with us. Factors that could lead to further
deterioration in the market-to-book-value ratio, or the crediting rate earned
by the accounts, include a decline in market value of securities held or of
fixed-income securities generally due to illiquidity, interest-rate or credit
risk or net cash outflows due to redemptions by participants in the accounts. A
wrap provider could attempt to minimize its exposure to further deterioration
in market value of the portfolio under its contract. It could do so by exercising its contractual
right to require the account to be managed within more restrictive investment
guidelines. This election is known as immunization. Following such an election, investments made
with additional cash contributions from participants are excluded from the wrap
providers contractual obligations. We
also have the contractual right to elect to immunize all or a portion of these
accounts at any time, including following receipt of notice of a wrap providers
election to terminate its agreement that benefit the accounts. The right of the participating investors to
redeem their units at a price based on book value would not be affected by
termination by a wrap provider or immunization. However, immunization of all or
part of an account may adversely impact cash flows with respect to the account,
potentially resulting in significant account redemptions. Moreover, our ability to continue to offer an
attractive crediting rate on these accounts, our reputation as a manager of
these types of products in the defined contribution market and the amount of
fees that we recognize from this portion of our business, would be adversely
impacted.
One of our wrap providers has notified us of its election to terminate
its relationship with us during the third quarter of 2008 as a result of its
decision to exit the business of providing wrap contracts. We are seeking to replace this wrap provider,
but there can be no assurance that we will be able to do so. There are a limited number of third-party
financial institutions that currently offer these products, limiting the
potential to find alternative wrap providers, and most accounts have investment
guidelines requiring multiple wrap contracts.
Moreover, one or more of our other wrap providers may seek to condition
continuing to wrap our products on our taking action to further support the
market value of the accounts assets, although we are not contractually
obligated to take such an action. If we
support the market value of these accounts under any circumstances to mitigate
the risks to our business, the cost to us could be material. Moreover, any
action by us to support these accounts could result, depending on the nature
and extent of such support, in the accounts being consolidated on our balance
sheet for financial reporting purposes.
If we were unable to replace one or more wrap providers that elect to
terminate their arrangements with us, we may elect to immunize the portion of
the accounts wrapped by the terminating wrap providers. Any action resulting in immunization of a
part of an account could cause either the other wrap providers or us to elect
immunization of the remainder
12
of such
account. In addition, a wrap provider
may seek to eliminate or reduce its contractual obligations. Such an action
could result in litigation with the defaulting wrap provider and the plans
investing in the accounts. Any discontinuation of the contracts with our
existing wrap providers, any inability to enter into new contracts with other
wrap providers, any failure by a wrap provider to fund account shortfalls under
its contract or any action by us or by a wrap provider to immunize all or a
portion of the wrapped accounts would adversely affect our business.
Investment, operational and other decisions
and actions, often made to achieve scale and other benefits, are implemented
over multiple investment pools as applicable, increasing the opportunity for
losses, even small losses, to have a significant effect. To mitigate these
risks to the investment pools, we seek to prudently manage the duration and
credit exposure of the pools, to satisfy large liquidity demands by the in-kind
delivery of securities held by the pools and to closely monitor liquidity
demand from investors; however, market conditions or increased defaults could
result in our inability to effectively manage those risks. To some degree, all
of our investment management pools hold potential risks to our reputation and
business prospects if the asset pools that we manage have higher than
anticipated redemption or other liquidity requirements and the pools incur
losses to meet such demands.
Other parts of our business where we
primarily act as agent, such as other investment management activities of SSgA
and certain of our broker/dealer-related businesses, do not currently have
significant liquidity requirements; however, as we develop new products in
response to customer demand and to remain competitive in a dynamic marketplace,
we could take on more principal risk in these businesses. Any increase in the extent
to which these or other businesses assume principal positions would increase
the risks associated with our liquidity management strategy.
The disruption in the global fixed-income
securities markets beginning in the third quarter of 2007 has had a substantially
greater impact upon liquidity and valuations in those markets than has
historically been experienced. Because demand from investors for fixed-income
products has markedly decreased and dealers have been less prepared to take
principal exposures, funding sources, such as the commercial paper markets for
conduits, have been less reliable and more expensive. At the same time, the
ability of the markets to absorb the sale of certain types of fixed-income
securities has been substantially impaired. These market conditions have made
the management of our own and our customers liquidity significantly more
challenging. As discussed above, the risks to State Street inherent in its
management of liquidity are significant, and a further deterioration in the
credit markets could adversely affect our consolidated financial position,
including our regulatory capital ratios, and could adversely affect our results
of operations and our business prospects in the future.
Reputational Risk
Our relationship with many of our customers
is predicated upon our reputation as a fiduciary and a service provider that
adheres to the highest standards of ethics, service quality and regulatory
compliance. Adverse publicity, regulatory actions, litigation, operational
failures, the failure to meet client expectations and other issues could
materially and adversely affect our reputation and our ability to retain and
attract customers. Preserving and enhancing our
13
reputation depends not only on maintaining systems and procedures that
address known risks and regulatory requirements, but also our ability to
identify and mitigate additional risks that arise due to changes in our
businesses and the marketplaces in which we operate, the regulatory
environment, and customer expectations. If any of these developments, including
our recently announced customer concerns related to certain SSgA active
fixed-income strategies, has a material effect on our reputation, our business
will suffer.
Credit Risk
Our focus on large institutional investors
and their businesses requires that we assume credit and counterparty risk, both
on- and off-balance sheet, in a variety of forms. We may experience significant
intra- and inter-day credit exposure through settlement-related extensions of
credit. From time to time, we may assume concentrated credit risk at the
individual obligor, counterparty, guarantor, industry and/or country level,
thereby potentially exposing us to a single market or political event or a
correlated set of events. The credit quality of our on- and off-balance sheet
exposures may be affected by many factors, such as economic and business
conditions or deterioration in the financial condition of an individual
counterparty, group of counterparties or asset classes. If a significant
economic downturn occurs in either a country or a region, or we experience the
failure of a significant individual counterparty, we could incur financial
losses that could adversely affect our earnings.
Financial Markets Risk
As asset values in worldwide financial
markets increase or decrease, our opportunities to invest in and service
financial assets change. Given that a portion of our fee revenue is based on
the value of assets under custody and management, fluctuations in the valuation
of worldwide securities markets will affect revenue. Many of the costs of
providing our services are relatively fixed; therefore, a decline in revenue
could have a disproportionate effect on our earnings. In addition, if
investment performance in our asset management business fails to meet either
benchmarks or the performance of our competitors, we could experience a decline
in assets under management and a reduction in the fees that we earn,
irrespective of economic or market conditions.
We have increased the portion of our
management fee revenue that is generated from enhanced index and actively
managed products, with respect to which we generally receive higher fees
compared to passive products. We may not be able to continue to increase this
segment of our business at the same rate that we have achieved in the past few
years. The amount of assets in active fixed-income strategies, for example, has
been adversely impacted since 2007. In addition, with respect to certain of our
enhanced index and actively managed products, we have entered into performance
fee arrangements, where the management fee revenue we earn is based on the
performance of managed funds against specified benchmarks. The reliance on
performance fees increases the potential volatility of our management fee
revenue.
Financial markets trading businesses, as well
as our asset and liability management activities, are also subject to market
risks. Adverse movements in levels and volatilities of financial markets could
cause losses that may affect our consolidated results of operations and
14
financial condition. In addition, changes in investor and rating agency
perceptions regarding certain asset classes or structures can also affect
volatility, liquidity and market prices, which, in turn, can lead to losses.
The degree of volatility in foreign exchange rates can affect our foreign
exchange trading revenue. In general, we benefit from currency volatility, although
it can increase risk. Foreign exchange revenue, all other things being equal,
is likely to decrease during times of decreased currency volatility. In
addition, as our business grows globally, our exposure to changes in foreign
currency exchange rates could affect our levels of revenue, expense and
earnings, as well as the value of our investment in our non-U.S. operations.
Interest-Rate Risk
State Streets financial performance could be
unfavorably affected by changes in interest rates as they impact our asset and
liability management activities. The levels of global market interest rates,
the shape of these yield curves (changes in the relationship between short- and
long-term interest rates), the direction and speed of interest rate changes,
and the asset and liability spreads relative to the currency and geographic mix
of our interest-earning assets and interest-bearing liabilities, affect our net
interest revenue. Our ability to anticipate these changes and/or to hedge the
related exposures on and off our consolidated balance sheet can significantly
influence the success of our asset and liability management activities and the
resulting level of our net interest revenue. The impact of changes in interest
rates will depend on the relative durations of assets and liabilities in
accordance with their relevant currencies. In general, sustained lower interest
rates, a flat or inverted yield curve and narrow interest-rate spreads have a
constraining effect on our net interest revenue.
Operational Risk
Operational risk is inherent in all of State
Streets activities. Our customers have a broad array of complex and
specialized servicing, confidentiality and fiduciary requirements. We have
established policies, procedures and systems designed to comply with these
regulatory and operational risk requirements. We also face the potential for
loss resulting from inadequate or failed internal processes, employee
supervisory or monitoring mechanisms, or other systems or controls, and from
external events, which could materially affect our future results of
operations. We may also be subject to disruptions from events that are wholly
or partially beyond our control, which could cause delays or disruptions to
operational functions, including information processing and financial market
settlement functions. In addition, our customers, vendors and counterparties
could suffer from such events. Should these events affect us, or the customers,
vendors or counterparties with which we conduct business, our results of operations
could be negatively affected.
Our success depends, in large part, on our
ability to attract and retain key people. Competition for the best people in
most activities in which we engage can be intense, and we may not be able to
hire people or retain them. The unexpected loss of services of one or more of
our key personnel could have a material adverse impact on our business because
of their skills, their knowledge of our markets, their years of industry
experience, and, in some cases, the difficulty of promptly finding qualified
replacement personnel. Similarly, the loss of key staff, either individually or
as a group, can adversely impact customer perception of our ability to continue
to manage certain types of investment management mandates. In some of our
15
businesses, we have experienced significant employee turnover, which
increases costs, requires additional training and increases the potential for
operational risks.
We enter into long-term fixed-price contracts
to provide middle office or investment manager and hedge fund manager
operations outsourcing services to customers, services related but not limited
to certain trading activities, cash reporting, settlement and reconciliation
activities, collateral management and information technology development. These
long-term contracts require considerable up-front investment by us, including
technology and conversion costs, and carry the risk that pricing for the
products and services we provide might not prove adequate to generate expected
operating margins over the term of the contracts. Profitability of these
contracts is largely a function of our ability to accurately calculate pricing
for our services and our ability to control our costs and maintain the
relationship with the customer for an adequate period of time to recover our
up-front investment. Performance risk exists in each contract, given our
dependence on successful conversion and implementation onto our own operating
platforms of the service activities provided. In addition, our failure to meet
specified service levels may adversely affect our revenue from such
arrangements, or permit early termination of the contracts by the customer.
We actively strive to achieve significant
cost savings by shifting certain business processes to lower-cost geographic
locations, while continuing to maintain service quality, control and effective
management of risks within these business operations. This transition to a true
shared services operational model focuses on certain core service offerings,
including middle- and back-office reconciliations, securities processing and
transfer agency activities. We have employed various structural arrangements to
achieve these goals, including forming joint ventures and wholly-owned
subsidiaries and establishing operations in lower cost areas, such as Eastern
Europe, India and China, and outsourcing to vendors in various jurisdictions.
The increased elements of risk that arise from conducting certain operating processes
in some jurisdictions could lead to an increase in reputational risk. During
periods of transition, greater operational risk and client concern exists
regarding the continuity of a high level of service delivery. The extent and
pace at which we are able to move functions to lower-cost locations may also be
impacted by regulatory and customer acceptance issues. Such relocation of
functions also entails costs, such as technology and real estate expenses, that
partially offset the financial benefits of the lower-cost locations.
Our businesses depend on an information
technology infrastructure to record and process a large volume of increasingly
complex transactions, in many currencies, on a daily basis, across numerous and
diverse markets. Any interruptions, delays and/or breakdowns of this
infrastructure can result in significant costs and reputational damage. As a
result, we continue to invest significantly in this infrastructure.
Our businesses and our relationship with
customers are also dependent upon our ability to maintain the confidentiality
of our and our customers trade secrets and confidential information (including
personal data about our employees, our customers and our customers customers).
While we undertake significant efforts to maintain and protect confidential
information from theft, loss or other misappropriation, unauthorized access to
such information can occur. In this regard, on May 29, 2008, we announced
that we are sending precautionary notifications to employees and certain customers
of the former Investors Financial that computer equipment
16
containing certain personal data was stolen from the facility of an
Investors Financial vendor. Any theft,
loss or other misappropriation of confidential information could have a
material adverse impact on our competitive positions, our relationships with
our customers and our reputation and could subject us to regulatory inquiries
and enforcement, civil litigation and possible financial liability or costs.
To the extent that we are not able to protect
our intellectual property through patents or other means, we are also exposed
to the risk that employees with knowledge of such intellectual property may
leave and seek to exploit our intellectual property for their own or others
advantage.
Litigation Risks
From time to time, our customers may make
claims and take legal action relating to our performance of fiduciary or
contractual responsibilities. If such claims and legal actions are not resolved
in a manner favorable to us, such claims may result in financial liability to
State Street and/or adversely affect the market perception of us and our
products and services, and could impact customer demand for our products and
services. We record balance sheet reserves for probable loss contingencies,
including litigation and operational losses. However, we cannot always
accurately estimate our ultimate exposure. As a result, any reserves we
establish to cover any settlements, judgments or operational losses may not be
sufficient to cover our actual financial exposure. Any underestimation or
overestimation could have a material impact on our consolidated financial
condition or results of operations.
In connection with certain of SSgAs active
fixed-income strategies, we established a reserve to cover legal exposure and
related costs in connection with such strategies as of December 31, 2007.
Among other things, the portfolio managers for certain actively managed
fixed-income strategies materially increased the exposure of these strategies
to securities collateralized by sub-prime mortgages and shifted the weighting
of these portfolios to more highly rated sub-prime instruments. During the
third quarter of 2007, as the liquidity and valuations of these securities,
including the more highly rated instruments, came under increased pressure, the
performance of these strategies was adversely affected, in some cases
significantly. The underperformance, which was greater than that typically
associated with fixed-income funds, also caused a number of our customers to
question whether the execution of these strategies was consistent with their
investment intent. This has resulted in several civil suits, including putative
class action claims. These lawsuits allege, among other things, that we failed
to comply with our standard of care in managing these active funds as a
fiduciary under ERISA. We have also received and are in the process of
responding to inquiries or subpoenas from federal and state regulatory
authorities regarding SSgAs active fixed-income strategies. Given our desire
to fully respond to customer concerns, following the end of the third quarter
of 2007, State Street undertook a further review of all the actively managed
fixed-income strategies at SSgA that were exposed to sub-prime investments.
Based on our review and ongoing discussions with customers who were invested in
these strategies, we established the reserve to address our estimated legal
exposure.
The reserve was established based upon our
best judgment as to legal exposures and related costs associated with certain
actively managed fixed-income investment strategies. As of
17
March 31, 2008, we had made settlement and related payments
totaling approximately $275 million, including amounts expended to support
certain accounts managed by SSgA that benefit from contractual arrangements
with wrap providers. The amount of the reserve is based on certain
assumptions. While we believe the reserve represents a reasonable estimate of
our legal exposure and other costs associated with these issues, we do not
believe that it is feasible to predict or determine the amount of such exposure
with certainty. As such, it is possible that we have overestimated or
underestimated our exposure. If the amount of our actual exposure is materially
different from our reserve, there would be a material impact on our
consolidated financial condition and results of operations.
To determine whether the issues that arose
within the active fixed-income area are limited to SSgAs active fixed-income
strategies, we are conducting, with the assistance of third-party consultants,
a systematic review of the operational, risk and compliance infrastructure,
procedures and resources across SSgAs entire product line. While this review
is ongoing, the conclusions or recommendations that have been made to date have
not identified any material legal or regulatory exposures; however, there can
be no assurance at this time as to the ultimate conclusions of such review.
Regulatory/Legal/Accounting/Tax
Risk
Most of our businesses are subject to
extensive regulation, and many of the customers to which we provide services
are themselves subject to a broad range of regulatory requirements. These
regulations may affect the manner and terms of delivery of our services. As a
financial institution with substantial international operations, we are subject
to extensive regulatory and supervisory oversight, both in the U.S. and
overseas in connection with our global operations. Our businesses are subject
to stringent regulation and examination by U.S. federal and state governmental
and regulatory agencies, including the Federal Reserve, the SEC and the
Massachusetts Commissioner of Banks, and self-regulatory organizations
(including securities exchanges), and by non-U.S. governmental and regulatory
agencies and self-regulatory organizations. The regulations affect, among other
things, the scope of our activities and customer services, our capital
structure and our ability to fund the operations of our subsidiaries, our
lending practices, our dividend policy and the manner in which we market our
services. Evolving regulations, such as the new Basel II regulatory capital
framework and anti-money laundering regulations, can require significant effort
on our part to ensure compliance. New or modified regulations and related
regulatory guidance may have unforeseen or unintended adverse effects on the
financial services industry.
If we do not comply with governmental
regulations, we may be subject to fines, penalties or material restrictions on
our businesses in the jurisdiction where the violation occurred, which may
adversely affect our business operations and, in turn, our financial results.
Similarly, many of our customers are subject to significant regulatory
requirements, and retain our services in order for us to assist them in
complying with those legal requirements. Changes in these regulations can
significantly affect the services that we are asked to provide, as well as our
costs. If we cause customers to fail to comply with these regulatory
requirements, we may be liable to them for losses and expenses that they incur.
In addition, adverse publicity and damage to our reputation arising from the
failure or perceived failure to comply with legal, regulatory or contractual
requirements could affect our ability to attract and retain customers or to
maintain
18
access to capital markets, or could result in enforcement actions,
fines, penalties and lawsuits. In recent years, regulatory oversight and
enforcement have increased substantially, imposing additional costs and
increasing the potential risks associated with our operations. If this regulatory
trend continues, it could adversely affect our operations and, in turn, our
financial results.
In the ordinary course of our business, we are
involved from time to time in civil litigation or arbitration, including
actions arising out of our contractual, fiduciary or employment
relationships. In certain of these
actions, claims for substantial monetary damages may be asserted against
us. In the ordinary course of our business,
we are also subject to various regulatory, governmental and law enforcement
inquiries, investigations and subpoenas.
These may be directed generally to participants in the businesses in
which we are involved or may be specifically directed at us. In regulatory enforcement matters, claims for
disgorgement, the imposition of penalties and the imposition of other remedial
sanctions are possible. Among other
inquiries, investigations and subpoenas, we have received federal and state
regulatory inquiries or subpoenas relating to SSgAs active fixed-income
strategies as to which we established a reserve in the fourth quarter of
2007. There can be no assurance as to
the outcome of the inquiries with regard to the SSgAs fixed-income strategies
or any other matter. Additional legal actions or regulatory matters may be
initiated from time to time in the future.
In view of the inherent difficulty of
predicting the outcome of such legal actions and regulatory matters, we can not
provide assurance as to the outcome of any pending matter or, if determined
adversely to us, the costs associated with any such matter, particularly where
the claimant seeks very large or indeterminate damages or where the matter
presents novel legal theories, involves a large number of parties or is at a
preliminary stage. Based upon the
information currently available to us, we do not believe that any pending legal
actions or regulatory matters will have a material adverse effect on our
consolidated financial condition or results of operations. However, the resolution of certain pending
legal actions or regulatory matters, if unfavorable, could have a material
adverse effect on our consolidated results of operations for any particular
quarter, depending on the magnitude of the loss or liability relative to our
results for that quarter.
New accounting standards, or changes in the
interpretation of existing accounting standards, by the Financial Accounting
Standards Board or the SEC, can potentially affect our consolidated financial
condition and results of operations. These changes are very difficult to
predict, and can materially impact how we record and report our consolidated
financial condition and results of operations and other financial information.
In some cases, we could be required to apply a new or revised standard
retroactively, resulting in the revised treatment of certain transactions or
activities, and, in some cases, the restatement of prior period financial
statements.
Our businesses can be affected by new tax
legislation or the interpretation of existing tax laws worldwide. Changes in
tax laws may affect our business directly or indirectly through their impact on
the financial markets. In the normal course of business, we are subject to
reviews by U.S. and non-U.S. tax authorities. These reviews may result in
adjustments to the timing or amount of taxes due and the allocation of taxable
income among tax jurisdictions. These adjustments could affect the attainment
of our financial goals.
19
Prior
to 2004, we entered into certain leveraged leases, known as sale-in, lease-out,
or SILO, transactions. In accordance with Statement of Financial
Accounting Standards, or SFAS, No. 13,
Accounting for Leases
,
we recorded income and deferred tax liabilities with respect to the SILO
transactions based on projected pre-tax and tax cash flows. The Internal
Revenue Service, or IRS, has proposed disallowing tax deductions arising from
those transactions, and we have been engaged in settlement discussions. In
connection with these discussions we have revised our projections of the timing
of tax cash flows and we have reflected those revisions in our leveraged lease
accounting under SFAS No. 13. We have also substantially reserved
for tax-related interest expense that may be incurred upon resolution of this
matter. On May 28, 2008, in a case involving a SILO transaction of another
taxpayer, a federal district court upheld the IRS tax position. We do not yet
know what effect, if any, such decision may have on our settlement discussions
with the IRS or on our evaluation of the potential exposure with respect to the
SILO transactions. If we were to further revise our projection of the
timing of tax cash flows from the leases, SFAS No. 13 would require us to
again recalculate the rate of return and the timing of the recognition of
income from the leases from inception. The effect of the SFAS No. 13
recalculation would be to reschedule the recognition of previously-recognized
income to future periods; that is, the charge we would record to income during
the period of revision would be recovered over the remaining lives of the
leases. In addition to the SFAS No. 13 recalculation, we would
increase our reserve for tax-related interest expense, which would be recorded
as an increase to income tax expense.
Risk
Management
A
comprehensive and well-integrated risk management function linked to our
strategy and capital is essential to the financial and operational success of
our global business activities. We seek to monitor and manage risk on a
corporate basis and within specific business units. The types of risk that we
monitor and seek to manage include, but are not limited to, operational risk,
interest-rate risk, trading risk, fiduciary risk, legal and compliance risk,
liquidity risk and credit risk. We have adopted various policies, procedures
and systems to monitor and manage risk. There can be no assurance that those
policies, procedures or systems are adequate to identify and mitigate all risks
inherent in our various business. In addition, our businesses and the markets
in which we operate are continuously evolving. We may fail to fully understand
the implications of changes in our business or the financial markets and fail
to adequately or timely enhance our risk framework to address those changes. If
our risk framework is ineffective, either because it fails to keep pace with
changes in the financial markets or our business or for other reasons, we could
incur losses.
We
also measure our material risks. Our measurement methodologies rely upon many
assumptions and historical analyses and correlations. There can be no assurance
that those assumptions will be correct or that the historical correlations will
continue to be relevant. Consequently the measurements that we make for
regulatory and economic capital may not adequately capture or express the true
risk profiles of our businesses. Additionally, as businesses and markets
evolve, our measurements may not accurately reflect those changes. While our
risk measures may indicate sufficient capitalization, we may in fact have
inadequate capital to conduct our businesses.
20
Capital Ratios
The following are certain of our capital ratios as of March 31,
2008:
Tier 1 leverage ratio
|
|
6.1
|
%
|
Tier 1 risk-based capital ratio
|
|
12.4
|
|
Total risk-based capital ratio
|
|
13.8
|
|
Tangible common equity to tangible assets (TCE/TA)
|
|
2.9
|
|
Investment
Portfolio and Asset-Backed Commercial Paper Conduits
Information concerning State Streets investment portfolio and
asset-backed
commercial paper conduit program
is filed with this Form 8-K as Exhibit 99.1.
Item
9.01. Financial Statements and
Exhibits.
(d)
Exhibits.
99.1
Information
concerning State Streets investment portfolio and asset-backed
commercial paper conduit program.
21
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly
authorized.
|
STATE STREET
CORPORATION
|
|
|
|
By:
|
/s/ David C. Phelan
|
|
Name:
|
David C. Phelan
|
|
Title:
|
Executive Vice
President and General
Counsel
|
|
|
|
Date June 2, 2008
|
|
|
22
EXHIBIT INDEX
Exhibit No.
|
|
Description
|
|
|
|
99.1
|
|
Information concerning
State Streets investment portfolio and asset-backed
commercial
paper conduit program.
|
23
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