May 8, 2009
By U.S. Mail and facsimile (617)664-8209)
Mr. Ronald E. Logue
Chairman and Chief Executive Officer
State Street Corporation
One Lincoln Street
Boston, Massachusetts 02111
Re: State Street Corporation
Form 10-K for year ended December 31, 2008
File No. 001-07511
Dear Mr. Logue:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
future
filings in response to these comments and provide us with your
proposed revisions. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
information so we may better understand your disclosure. After
reviewing this information, we may raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Form 10-K
Risk Factors, page 5
1. Please revise, in future filings, the risk of counterparty
failure
or instability, to quantify for 2 comparable periods, the
counterparty risk in the aggregate and identify any individual
counterparty whose failure would result in a material charge.
Please
make similar changes to your Management`s Discussion in your
upcoming
filings.
2. Please revise, in future filings, the risk related to the
purchase
of assets from the unconsolidated asset-backed commercial paper
conduits, the last paragraph to disclose the after-tax net
unrealized
losses for the prior comparable period also. In addition, disclose
the aggregate amount of assets purchased for each period and the
after-tax net unrealized losses in those purchases. Finally,
disclose
whether there are any reserves established for the unconsolidated
unrealized losses.
3. Please supplementally provide us with the assumptions used in
the
"expected loss model" referred to in the last risk factor on page
11.
In this regard, advise us, with a view towards additional
disclosure,
as to how the majority of the losses, $3.56 billion, from the risk
directly above, would be covered by the $67 million in first loss
notes. Finally, advise us as to the amount of net after-tax
unrealized losses not covered by guarantees that were in the
conduits
at 12/31/08.
4. With regard to the risk related to unregistered cash collateral
pools on page 14, supplementally provide the staff with the
following
information:
* The aggregate dollar amount of sales when the NAV was less than
$1.00;
* The section(s) of the corporate governance documents for the
cash
collateral pools that discloses/discusses the sales price for the
pools;
* The section(s) of the corporate governance documents of the
pools
that you state you are in compliance with and an analysis of your
compliance; and,
* Copies of any notice that you have provided to purchasers of the
pools when purchases are made when the NAV was/is under $1.00.
Notes to Consolidated Financial Statements
Item 7. Management`s Discussion and Analysis of Financial
Condition
and Results of Operations
Financial Highlights, page 33
5. We note disclosure on page 35 of your intention to reduce the
size
of your balance sheet, which will reduce your net interest margin
for
2009 by 13% to 18%. Please tell us and revise future filings to
clearly discuss and provide enhanced disclosure surrounding how
you
intend to reduce your balance sheet, including specific asset
classes
that you intend to sell-off or pay down. Within this context,
please
also address and provide the business purpose behind your
reclassification of certain asset- and mortgage-backed securities
with an amortized cost of $14.6 billion and fair value of $12.3
billion from securities available for sale to securities held to
maturity in the fourth quarter of 2008.
Investment Securities, page 60
6. We note your disclosure that securities rated "AA" and "AAA"
comprised approximately 89% of your investment securities
portfolio
at December 31, 2008. We also note that you have investments
representing 5% of your portfolio which are rated medium-grade or
below as of December 31, 2008. This concentration has increased to
9.8% of your portfolio as of March 31, 2009 per review of your
Form
8-K filed April 21, 2009. Due to the significance of both your
investment securities portfolio and related unrealized loss
position
to your financial statements, please tell us and revise your
future
filings to disclose the following:
* An expanded disclosure of your accounting policies for reviewing
your investment securities for impairment, including discussion of
the relevant authoritative guidance you rely upon for different
types
of securities as applicable, such as SFAS 115, EITF 99-20, etc.;
* For those securities with significant duration and severity of
temporary impairment at the end of the period presented, for
example,
gross unrealized losses of $5.14 billion for asset-backed
securities
and $684 million for collateralized mortgage obligations as of
December 31, 2008 per the table on page 95, an enhanced discussion
of
the specific securities impaired, the analysis performed and
specific
factors considered in reaching a conclusion that an other than
temporary impairment had not occurred; and
* For those securities for which an other than temporary
impairment
was recognized, for example, $122M in 2008 per your disclosures on
page 95, an enhanced discussion of the specific securities
impaired,
the analysis performed and related reasons for the impairment
recognition in the current period especially as compared to
similar
securities for which an other than temporary impairment was not
recognized, to the extent applicable.
Note 3. Investment Securities, page 94
7. Please revise future filings to present the gross unrealized
losses table on page 95 distinguishing between investments
classified
as available for sale and investments classified as held to
maturity.
Note 4. Loans and Lease Financing, page 96
8. We note your disclosures herein and on page 63 relating to your
repurchase of approximately $800 million of commercial real estate
loans from certain customers pursuant to indemnified repurchase
agreements with an affiliate of Lehman Brothers. We also note
your
disclosure that on the date of acquisition, you accounted for
these
loans in accordance with SOP 03-3. We further note that as of
December 31, 2008, there were approximately $219 million of these
loans which were past-due and still accruing interest for which
you
state that no additional valuation adjustments or provisions for
losses were recorded since initial acquisition. Please address
the
following:
* Tell us the amount of loans that were past due and accruing
interest at the initial acquisition date;
* How you determined that the continual accrual of these past-due
loans was appropriate and that no additional valuation adjustments
or
provisions for loss were necessary on these acquired loans; and
* Provide us with an update as to the current status of the
performance of these acquired loans.
Note 11. Commitments and Contingencies
Tax Contingencies, page 104
9. We note your disclosures related to your SILO leveraged lease
transactions, the IRS` standard settlement offer, and your
decision
not to accept this offer but to continue your appeal of this
ruling.
We also note that based upon this settlement offer, you have
revised
your projections of the timing and amount of tax cash flows and
also
increased your tax-related interest expense. We note your
disclosure
on page 34 that as a result of these revisions, you recorded a $98
million reduction to net interest income and $39 million increase
to
income tax expense during 2008. Please address the following:
* We note that your deferred tax liability for your lease
financing
transactions decreased from $1.177 billion as of December 31, 2007
to
$535 million as of December 31, 2008 as presented in your income
tax
footnote on page 131. Please tell us the reasons for this
decrease
and whether any of this decrease pertains to your SILO leveraged
lease transactions; and
* Please tell us how you determined it "more likely than not" that
your position will be sustained in your appeal based upon IRS`
recent
settlement offer and previously successful challenges of these
transactions. Additionally, please tell us how your facts and
circumstances are different from the IRS` ruling.
Please reference consideration given to guidance in SFAS 109, FIN
48,
and any other authoritative literature as necessary in your
response
to support your accounting.
Note 21. Expenses, page 130
10. We note disclosure relating to your election in the fourth
quarter of 2008 to provide support to certain investment accounts
managed by SSgA through the $2.49 billion purchase of asset- and
mortgage-backed securities and a $450 million cash infusion, which
resulted in a charge of $450 million. Please address the
following:
* Explain the nature and legal structure of these pooled
investment
accounts;
* Tell us whether the entire $450 million charge resulted from the
$450 million cash infusion and, if not, what portion of it related
to
the purchase of asset- and mortgage-backed securities;
* Tell us how you accounted for the cash infusion of $450 million
contributed to the investment accounts;
* Tell us in detail the specific contractual obligations of the
independent third-party financial institutions ("wrap providers")
that agree to make up any shortfall in the investment accounts.
In
your response, include discussion of how and when a wrap provider
can
terminate its financial guarantees and the resulting effect this
would have on your obligations to perform under these agreements;
* Tell us why you determined it necessary to provide this support,
even though these investment accounts had contractual arrangements
with wrap providers that would require them to make up any
shortfall;
* Tell us whether any wrap providers have eliminated or reduced
their
contractual obligation, and if so, whether this has resulted in
litigation with the defaulting wrap provider(s) or the plans
investing in the investment accounts;
* You state that as a result of the $450 million contribution, the
ratio of the market value of the accounts` portfolio holdings to
the
book value of the accounts increased. Please tell us what this
ratio
was immediately before and after this election to provide support,
as
of December 31, 2008, and as of the date of your response in
addition
to any minimum ratio(s) required to be contractually maintained,
as
applicable; and
* Discuss any triggers (i.e. minimum ratios, termination of
financial
guarantees, downgrades to assets, etc.) that would require you to
either purchase additional assets and/or provide additional cash
infusion. We note your disclosure that you have no ongoing
commitment
or intent to provide support.
11. Given your election in the fourth quarter of 2008 to provide
support to the investment accounts and the resulting charge of
$450
million, please tell how you were able to conclude that you were
not
the primary beneficiary and therefore not required to consolidate
the
assets and related liabilities of these investment accounts in
accordance with FIN 46(R) or other authoritative accounting
literature considered. In your response please tell us how you
considered each of the following:
* Your decision to purchase assets and provide a cash infusion
although not contractually required;
* The ability of the third-party financial institution to
terminate
their financial guarantees;
* The likelihood that you would provide additional support in the
form of either additional purchases or cash infusions, even
thought
you state that you have no ongoing commitment or intent to provide
such support; and
* The fact that participants are allowed to purchase and redeem
units
at a constant net asset value regardless of the underlying value
of
the assets held by the account.
12. We note your disclosure on page 14 that any future decision to
provide financial support to the investment pools would result in
the
recognition of significant losses and could in certain situations
require you to consolidate the investment pools onto your balance
sheet. If you determined that you were not the primary beneficiary
of
these pooled investment accounts subsequent to providing them
support
in the fourth quarter of 2008 and therefore not required to
consolidate these accounts, please tell us the certain situations
that could require you to consolidate these investment pools onto
your balance sheet.
13. You further state on page 14 that a failure or inability to
provide such support could damage your reputation among current
and
prospective customers. Please tell us how you considered
reputational
risk and the possibility that you may provide similar support to
the
pooled investment accounts in the future in concluding that
consolidation of these investment pools was not required in the
fourth quarter of 2008.
14. As it relates to your $2.49 billion purchase of debt
securities
from these investment accounts, we note your disclosure that these
were purchased because these were identified as presenting
increased
risk in the current market environment. Please tell us following:
* The fair value and unrealized loss, as applicable, of these
securities as of the date of purchase, as of December 31, 2008 and
as
of the date of your response;
* How you classified these securities upon purchase (i.e.
available-
for-sale, held-to-maturity) and whether this classification has
since
changed; and
* Since you disclose that these securities were identified as
presenting increased risk in the current market environment,
whether
you have recorded any impairment on these securities.
15. Given the significant impact on your operating results in the
fourth quarter of 2008 of the support provided to these investment
accounts and your ongoing involvement with them, please revise
your
future filings to provide an expanded discussion of the
developments
in the SSgA managed fixed-income investment accounts similar to
that
provided in your Form 8-K filed on October 15, 2008.
Form 8-K, filed April 21, 2009
Exhibits 99.1 and 99.4
16. We note presentation of your "tangible common equity (TCE)
ratio," "pro forma TCE ratio," and "TCE ratio calculated as a
percentage of risk-weighted assets." These ratios appear to be
non-
GAAP financial measures as defined by Regulation G and Item 10(e)
of
Regulation S-K as they are not required by GAAP, Commission Rules,
or
banking regulatory requirements. To the extent you plan to
provide
these non-GAAP ratios in the future, the staff notes the
following:
* To the extent you disclose these ratios in future filings with
the
Commission, you should comply with all of the requirements in Item
10(e) of Regulation S-K, including clearly labeling the ratios as
non-GAAP measures and complying with all of the disclosure
requirements;
* To the extent you disclose these ratios in the future in Item
2.02
of Form 8-K, you should provide all of the disclosures required by
Item 10(e)(1)(i) of Regulation S-K as required by Instruction 2 to
Item 2.02 of Form 8-K;
* To the extent you disclose or release publicly any material
information that includes a non-GAAP measure, you should be
cognizant
of the requirements in Regulation G to label the measure as non-
GAAP
and provide a reconciliation to the most closely comparable GAAP
measure;
* As it relates to the presentation of risk weighted assets, in
future filings, please generally disclose how risk weighted assets
are calculated under regulatory capital rules and specifically
state,
if true, that the number disclosed is calculated consistent with
banking regulatory requirements. In the event that this number is
preliminary and it will not be finalized until filed with your
banking regulator, provide disclosure in this regard; and
* Consider including a statement stating that there is no
conforming
definition for calculating these non-GAAP ratios and therefore
your
current presentation may not be directly comparable to your peers.
17. As a related matter, we note on page six of Exhibit 99.4 your
presentation of how TCE ratio is calculated. Please tell and
revise
future filings to explain the reasons for excluding both AMLF
investment securities and excess reserves held at central banks
from
your calculation of this measure and why the exclusion of these
amounts provides more meaningful information to investors.
18. As it relates to your pro forma measures presented, please
tell
us how you determined these measures comply with Rule 11-01 of
Regulation S-X. Additionally, please tell us why you have assumed
consolidation of all four of your sponsored unconsolidated
conduits.
If you are unable to support your current presentation of these
pro
forma measures, please revise your future filings beginning with
your
next Form 10-Q, to appropriately label these non-GAAP measures.
Please respond to these comments within 10 business days or
tell us when you will provide us with a response. Please furnish
a
cover letter that keys your response to our comments, indicates
your
intent to include the requested revisions in future filings,
includes
your proposed disclosure revisions and provides any requested
supplemental information. Please understand that we may have
additional comments after reviewing your responses to our
comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
Any questions regarding the accounting comments may be
directed
to John Spitz at (202) 551-3484 or Amit Pande at (202) 551-3423.
All
other questions may be directed to Michael Clampitt at (202) 551-
3434
or to me at (202) 551-4518.
Sincerely,
Christian Windsor
Special Counsel
Office of Financial