State Street Corp Should Be Falling, not Rising

Another one for the annals of bizarre stock moves: State Street Corp (STT), the parent of State Street Global Advisors is surging to new all-time highs today. This is on the news that the company has breached its fiduciary duties to its clients so egregiously that it has set up a legal reserve of more than half a billion dollars ($618 million, to be precise) which will be used to defend itself from - and probably make settlements with - investors who were sold safe products and ended up in very risky ones.

In a related move, the CEO of State Street Global Advisors, William Hunt, has been fired with severance compensation and benefits worth a total of $14.1 million, not including vested stock options worth another $4.1 million and retirement benefits worth $900,000. Not particularly bad for three years' work, considering that it was he who was ultimately responsible for that $619 million liability.

Remember that the $619 million is State Street's estimate of its narrow legal liabilities: the hit to its reputation is far worse. An asset manager sells one thing above all others: trust. No one in their right mind will park their money with an asset manger whom they can't trust, let alone a manager which breaches its fiduciary duty to the point of opening itself up to massive lawsuits.

The stock market seems to be taking the legal liability as just another charge to earnings - and for reasons I don't pretend to understand, the charge to earnings is just $279 million, less than half the size of the fund. That charge, of 71 cents per share, didn't stop State Street from upping its earnings estimate for 2007 - which I guess is why the stock rose.

But I'm less sanguine about all this than the stock market. We're talking about major lawsuits from the likes of Prudential Financial (PRU), here, as well as no fewer than three class-action suits. State Street might have done well in 2007, but it remains to be seen how this publicity will affect its business in 2008. I can't imagine it'll help.