Trust Banks: Steady in Crunch Time

Still the trust banks aren't totally immune to credit exposures.

Bank of New York Mellon has some corporate loan exposure. [The company also] brought onto their balance sheet their asset-backed commercial paper conduit. When they did that they had to move the asset-backed commercial paper conduit onto their books and at that time they had to recognize the losses in the asset values and that was the charge they had taken.

Northern Trust has some construction loan exposure.

State Street has this asset-backed conduit off their books. They may be forced to bring it on to their balance sheet, which is one of the reasons we think they raised the capital, due to the fact that they're tangible common equity ratio would have plummeted if they were forced to take this asset-backed conduit onto the books. We anticipate they will have to take it onto the books, which is going to continue to pressure their price-to-earnings multiple, in our opinion, because now they do have some risk on the books.

Additionally, State Street is running into the problem with the mark-to-market accounting in their investment portfolio. That's now becoming an issue because they have a very large unrealized loss that may turn into a permanent loss, but right now it's being viewed as temporary.

Some firms are also facing various litigation. What's going on there?

State Street had a product that they sold to their customers -- an enhanced index product marketed to the clients as a safe alternative to a traditional money market fund. Unfortunately the enhanced index product invested in structured investment vehicles and other structured product-type investments and when those structured investments fell from grace then the owners of those investments took a beating in their funds. State Street funds that own these investments obviously reported negative returns and I think their customers were very surprised that there was that kind of risk in their portfolio and there has been a lawsuit filed. Their clients feel that they were not made fully aware of the risk that was in the funds.