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State Street Under Pressure

State Street is down midday on a headline from the WSJ: "$625M reserve for exposure to sub-prime crisis 'May not be sufficient'."

However, the decline may not relate to further losses in the sub-prime exposure; rather it seems to relate to legal action against them regarding the portfolio.

Here is what State Street said in its 10Q:

"Several customers have filed litigation claims against us (my emphasis), some of which are putative class actions purportedly on behalf of customers, including customers which invested in certain of State Street Global Advisors', or SSgA's, active fixed-income strategies. These claims related to investment losses in one or more of SSgA's strategies that included sub-prime investments. In 2007, we established a reserve of approximately $625 million to address legal exposure associated with the under-performance of certain active fixed income strategies (my emphasis) managed by SSgA and customer concerns as to whether the execution of these strategies was consistent with the customers' investment intent. These strategies were adversely impacted by exposure to, and the lack of liquidity in, sub-prime mortgage markets that resulted from the disruption in the global securities markets during the second half of 2007. After aggregate payments of $432 million, the reserve totaled approximately $193 million at June 30, 2009."

They went on to say:

"If the SEC or other regulators were to pursue an enforcement action, they would likely seek monetary or other penalties or remedies. Depending upon the resolution of these governmental proceedings, the remainder of the reserve established in 2007 may not be sufficient to address ongoing litigation, as well as any such penalties or remedies."

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