State Street Corporation (NYSE:STT) has announced that it will record a net after-tax charge in the fourth quarter of 2007 of $279 million, or $0.71 per share. The charge is to establish a reserve to address legal exposure and other costs associated with the underperformance of certain active fixed-income strategies managed by State Street Global Advisors, the company’s investment management arm, and customer concerns as to whether the execution of these strategies was consistent with the customers’ investment intent.

Can you say "fiduciary responsibility" issues? 

In aggregate, the reserve will be $618 million on a pre-tax basis. The impact to earnings of the net charge, after taking into account the tax effect of the reserve and associated lower incentive compensation cost, will be $279 million.

State Street also announced that James Phalen, executive vice president and head of international operations for investment servicing and investment research and trading, is returning to SSgA as interim president and chief executive officer. Phalen succeeds William W. Hunt who has resigned from State Street.

Earnings per share for 2007 are expected to be between $3.42 and $3.45 per share, and return on equity is expected to be approximately 13%, all on a GAAP basis.  On an operating basis 2007 earnings per share is expected to be between $4.54 and $4.57 per share and return on equity is expected to be approximately 17.5%.  We have a First Call estimate of $4.19, although we’d caution that these charges will make any direct comparison ‘cloudy.’

Jon C. Ogg
January 3, 2008

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