How did State Street (STT), the boring old Boston-based custodial bank, get itself caught up in the credit mess?
The first paragraph of the Journal’s look at the company’s woes tells you all you need to know:
For much of its two centuries, State Street Corp. has been a stodgy Boston institution. It was content to act as custodian for investment firms’ securities and to take care of their mundane back-office chores.
How many sad stories start like this? Replace “Reserve Fund” (the buck-breaking money market fund) for “State Street” and it’s basically the same tale. Not surprisingly, the company found a way to get into housing-related securities:
It got into conduits, which are instruments that buy such things as asset-backed and mortgage-backed securities, using short-term borrowings. It shifted its investment portfolio from predominantly government bonds into mortgage-backed securities, which rode the housing boom. Then last year, the housing market fell apart and ensnared the financial world — and State Street — in a credit crunch.
The article notes that rival Mellon got into the same investments to a lesser degree, and that Northern Trust completely avoided the temptation.
Our question: There were all kinds of ways to play the housing-related boom… what was the regulatory statute that encouraged these custodial firms to go this route?
As we noted earlier this week, what’s most impressive is the way the market, early on, whacked State Street shares, well before the company admitted their might be a problem, or articles like this started appearing.
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