Ronald E. Logue: Volatile markets led to new business.
Globe 100 | No. 2 - State Street Corp.
Battered but unbeaten
As others struggled, Boston financial giant State Street emerged from the federal bailout
Ronald E. Logue: Volatile markets led to new business.
Among the world's largest money managers, with $1.4 trillion in its hands, State Street Corp. posted record earnings of $1.8 billion in 2008. It's the only company in financial services that ranks anywhere near the top of the Globe 100 list. State Street made the number two slot despite - and partly because - 2008 was the worst year for the stock market in decades.
Although the Boston company makes its money by managing investments and providing services to mutual funds and hedge funds, it saw some benefits last year from the volatility in the market. For one thing, it did a huge volume of trading in foreign currencies for its clients. And it saw new pension fund assets come in the door as investors moved to passively managed index funds, a State Street specialty.
It also continued to bring in new business, particularly accounting and record-keeping for large investment funds, even as the market tanked. There was $111 billion in new accounts coming online in the first quarter, much of that sold last year.
"We had an unusually large amount of new-business wins last year," said chief executive Ronald E. Logue. "That helped a lot. That's the consistent revenue that stays."
But it didn't always feel like a banner year, as the global financial meltdown landed at its doorstep. The company was one of nine giant institutions whose chief executives got a phone call from then-Treasury Secretary Henry M. Paulson last October. The result: $2 billion in government funds that State Street was told to take and put to use, to shore up its capital and to help calm the markets.
Logue now says he can't wait to send the $2 billion back.
The funds had no meaningful impact on earnings last year, executives said, and probably won't in 2009 either. The company has made nearly half of the money available to large clients like mutual funds to borrow in the event of large customer withdrawals, and they need cash to cover them. The money is basically a credit line on which State Street can earn fees, while helping clients avoid having to raise cash by selling off stocks and bonds in a fire sale.
Meanwhile, the company paid the government $25 million in dividends on the federal money (which came in the form of a preferred stock investment) in the first quarter of this year.
State Street also has been slashing expenses, including cutting 2,200 jobs, a move Logue called painful but necessary. Logue said he's going to continue to plan for a bumpy ride in 2009.
"The reason we had good performance relative to our peers is because of all the work we've done on the expense side," Logue said of first quarter 2009. "Not this quarter, but two, three quarters before."
Analysts have applauded the belt-tightening. But they continue to watch carefully some $9.5 billion in investment holdings that stopped trading amid the market chaos last year. The company hasn't lost any money on the securities, but it could if it has to eventually write down the depressed valuations as real. And State Street, long known for its cautious ways, saw its stock battered by Wall Street for wandering into the same sort of trouble as other investment firms.
Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine, said that another big issue for State Street this year is its capital cushion. "The company has decided that this is the year they're going to focus on building capital," he said, and it's forecasting slower earnings at the same time.
If the market dives further, Cassidy said, that would hurt State Street. On the other hand, if the markets rise 20 percent this year, "State Street will clearly benefit from that."
Beth Healy can be reached at bhealy@globe.com. 
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