State Street Corporation, by some estimates the largest manager of cash and cash equivalents, released its 4th quarter earnings Friday and hosted a conference call this morning. The company revealed positive earnings, but took a $450 million charge on its stable value funds and revealed stresses in its securities lending pools. The company's SSgA and State Street Institutional money market funds were not involved, though, and these continue to be unharmed by the continued market turmoil.
While money market funds and auction-rate securities have gotten most of the headlines over the past 17 months, other "cash"-type investments, such as stable value funds, securities lending collateral reinvestment pools, and bank short-term investment funds, have gained some notice recently, primarily from support actions disclosed by their managers or from those rare losses taken by participants. State Street has not experienced any loss events or securities defaults in its stable value or sec lending portfolios, but its 8-K filing sheds light on the overall toll and risks market stresses placed on these types of portfolios in the fourth quarter. Note that these money fund-like pools normally don't have the stringent quality guidelines, nor the daily liquidity needs, of money market mutual funds.
The company's filing warns, "We may be exposed to customer claims, financial loss, reputational damage and regulatory scrutiny as a result of transacting purchases and redemptions relating to the unregistered cash collateral pools underlying our securities lending program at a net asset value of $1.00 per unit rather than a lower net asset value based upon market value of the underlying portfolios. A portion of the cash collateral received by customers under our securities lending program is invested in cash collateral pools that we manage.... Our cash collateral pools that are money market funds registered under the Investment Company Act are required to maintain, and have maintained, a constant net asset value of $1.00 per unit. The remainder of our cash collateral pools are bank collective investment funds.... These unregistered cash collateral pools seek, but are not required, to maintain, and transact purchases and redemptions at, a constant net asset value of $1.00 per unit. At December 31, 2007, September 30, 2008 and December 31, 2008, the aggregate net asset value of these unregistered cash collateral pools (based on a constant net asset value of $1.00) was approximately $178 billion, $150 billion and $113 billion, respectively."
It continues, Throughout 2008 and currently, these unregistered cash collateral pools have continued to transact purchases and redemptions at a constant net asset value of $1.00 per unit even though the market value of the unregistered cash collateral pools portfolio holdings, determined using pricing from third party pricing sources, has been below $1.00 per unit. At December 31, 2008, the net asset value based upon market value of our unregistered cash collateral pools ranged from $0.908 to $1.00, with the average weighted net asset value on such date being $0.955.... We believe that our practice of continuing to transact at $1.00 per unit at the unregistered cash collateral pools, notwithstanding the underlying portfolios having a market value of less than $1.00 per unit, is consistent with the practices of other securities lending agents and in compliance with the terms of our unregistered cash collateral pools. We have continued this practice for a number of reasons, including that none of the securities in the cash collateral pools is currently in default or considered by the pools to be impaired, that there are restrictions on withdrawals from the collective investment funds and that the cash collateral pools have adequate sources of liquidity from normal lending activity under the securities lending program."
