UPDATE: State Street Selling $11 Billion Of Securities At Projected $350 Million Loss
December 09 2010 - 12:15PM
Dow Jones News
State Street Corp. (STT) said Thursday it sold $11 billion of
mortgage and asset-backed bonds from its investment portfolio,
reducing its risk and strengthening its capital ratios as U.S.
banks prepare to meet new capital standards.
Barclays Capital (BCS, BARC.LN) and Goldman Sachs (GS) bought
most of the securities, according to people familiar with the
transactions. Barclays bought at least some of the asset-backed
securities in the deal and Goldman Sachs bought about $6 billion in
non-agency mortgage-backed securities in the sale, almost all of
which were below triple-A rated and containing Alt-A, prime and
subprime home loans, according to the sources.
Spokesmen for Barclays and Goldman declined to comment.
State Street, Boston, one of the largest asset custodians and
money management firms with $20.2 trillion of assets under custody
or administration, is expected to take a $350 million loss in the
fourth quarter.
The sale confirms two trends that are combining to create
increased appetite for riskier assets. Banks holding tainted assets
will have to increase their net margins and their reserve capital
under new capital guidelines called the Basel III Accords. To avoid
this, many banks are expected to start selling their assets rated
below AAA. At the same time, low interest rates are encouraging
yield-starved investors and money managers sitting on piles of cash
to snap up riskier, higher-yielding securities.
Next year is expected to be a big year for sales of toxic assets
by banks, said Frederick Cannon, the co-director of research and
chief equity strategist for Keefe Bruyette & Woods. Banks have
increased their capital bases and reserves enough to absorb some
losses on the sales, he said.
Two years after the worst of the credit crisis, prices for
non-agency mortgage securities have vastly recovered, fetching
anywhere from 70 cents to more than 100 cents on the dollar
compared to the 10 cents on the dollar prices being quoted in late
2008, according to Paul Norris, a portfolio manager with Dwight
Asset Management, Burlington, Vt., with more than $65 billion in
fixed income assets.
"We will see more of these portfolio sales as banks look to
adopt Basel III," Norris said.
Gerard Cassidy, an analyst at RBC Capital Markets, said the deal
will help State Street improve the risk profile of its portfolio,
which had $80 billion available for sale at the end of the third
quarter. Unrealized losses in the portfolio peaked at $6.3 billion
in the fourth quarter of 2008. As of the third quarter this year,
those unrealized losses had declined to $281 million.
State Street said the concentration of AAA-rated and AA-rated
issues in its portfolio will rise six percentage points to 88% as a
result of the sale.
The sale included $4.1 billion of U.S. non-agency
mortgage-backed securities and $3.7 billion of asset-backed
securities, plus non-U.S. securities of $2.5 billion and $600
million, respectively.
State Street affirmed its 2010 earnings projections on an
operating basis.
Shares traded down 3.6%, to $44.52 in recent trading.
-By Liz Moyer and Prabha Natarajan, Dow Jones Newswires;
212-416-2512; liz.moyer@dowjones.com
--David Benoit and Tess Stynes of Dow Jones Newswires
contributed to this article.
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