State Street Fined for Failed CDO - Analyst Blog
March 01 2012 - 10:53AM
Zacks
State Street Corporation (STT) has been
penalized by Massachusetts state regulators for its alleged role in
marketing and selling risky collateralized debt obligation (CDO)
without disclosing proper information to its clients. The company
has been asked to pay a total of about $5 million ($3.54 million as
fees and profits earned on the deal and $1.45 million as
penalty).
In 2006, as an investment manager for a CDO, known as Carina CDO
Ltd., State Street was helped by Magnetar Capital LLC, a hedge fund
in selecting the assets that were included in the CDO. In addition
to this, the company was approached by Deutsche Bank
AG’s (DB) Deutsche Bank Securities unit to market and sale
the CDO.
However, Magnetar had placed a bet that some of the assets that
were included in the CDO would fail and State Street failed to
inform the investors who bought the CDO about this predicted mess.
Thus, the investors failed to make an informed investment decision
as they were unaware of the conflict of interest between Magnetar
and other Carina investors.
State Street allegedly harmed the investors by leaving them with
a loss of nearly $450 million when Carina failed. However, at this
moment, State Street is neither admitting nor denying the findings
of the Massachusetts regulators or the conclusions regarding
information contained in the offering documents for the CDO.
Massachusetts state regulators have been trying to find out how
the banks structured and sold a large number of debt products,
prior to the financial crisis in 2008. Last month, Massachusetts
regulators stated that they were investigating whether Bank
of America Corporation (BAC) had knowingly inflated the
value of assets in two loan portfolios that were sold to the
investors in the form of collateralized loan obligations. These
loan portfolios led to nearly $150 million of losses to the
investors.
Conclusion
We believe that by penalizing State Street, Massachusetts
regulators have shown that financial institutions are liable for
fines if they do not disclose correct information to the investors.
Moreover, the inquiries and fines will lead to proper disclosures
of the loan values and other debts by the banks and other financial
institutions, which they sell to the investors.
Currently, State Street retains a Zacks #3 Rank, which
translates into a short-term ‘Hold’ rating.
BANK OF AMER CP (BAC): Free Stock Analysis Report
DEUTSCHE BK AG (DB): Free Stock Analysis Report
STATE ST CORP (STT): Free Stock Analysis Report
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