State Street Hit Bitten by Mortgage Exposure; Investment Chief Resigns

State Street Corporation, the nation’s largest institutional money manager, said Thursday that it will set aside $618 million to cover legal and related costs associated with the company’s exposure to subprime mortgages. In a press statement, State Street said its exposure to the subprime mortgage markets led to the “underperformance of certain fixed-income strategies managed by State Street Global Advisors, the company’s investment management arm, and customer concerns as to whether the execution of these strategies was consistent with the customers’ investment intent.” The subprime misstep cost investment chief William Hunt his job, with State Street saying the investment management CEO had resigned from his post. He will be succeeded on an interim basis by James Phalen, currently executive vice president and head of international operations for investment servicing and investment research and trading, the company said. “We have reviewed the actively managed fixed-income strategies at SSgA that contained investments backed by sub-prime mortgages,” said Ronald E. Logue, chairman and chief executive officer of State Street. “Based on our review and discussions with certain customers who were invested in these strategies, we have established this reserve to address legal exposure and other costs relating to these strategies.” Hit to Analyst Expectations Earnings per share for 2007 are expected to be between $3.42 and $3.45 per share after the charge, State Street said. Bloomberg reported that analysts it polled had been expecting net earnings of $4.19 a share. Operating profit, excluding the writedown and other expenses, will be $4.54 to $4.57 a share. I’ve noted in earlier posts that the litigation machine over the mortgage mess was still warming up; I don’t think this will be the last such instance of money managers needed reserves to cover litigation and/or settlement costs.