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State Street Not Too Big to Fail

By Ned Douthat from Ockham Research on

State Street (STT - Get Report) has had a horrendous day of trading thus far as its shares are off by more than 50%. The Boston-based bank, which handles custodian responsibilities for many institutions and mutual funds, as well as other money management services, reported before the open of business on Tuesday that there were substantial mark-to-market losses on the company's balance sheet.

The losses from the last quarter are in the billions and much of these are related to a secondary business of State Street, managing money-market funds. These losses are as yet unrealized, but more than doubled in the quarter.

The market is obviously skittish about financials right now, and up until now, State Street was thought to be fairly insulated from the credit crisis. After all, the company does not lend money, it manages assets. However, this is further proof that there is no such thing as a safe stock among the financials.

We wrote about State Street as a possible beneficiary of the increasing move of institutional money managers to branch off on their own and thus need a custodian for the assets that they are able to gather.

This trend does seem to bode well for State Street in the future, but as today's announcement demonstrates, the entire firm can be brought crashing down by a business line that is not their core business. The trouble arose from money market funds that were being reported to have NAVs of $1 per unit, while the underlying assets were actually worth less. As State Street's SEC filing says,
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