Skip to main content

State Street props up stable value funds - another crack in the foundation?

There is good news and bad news. The good news is that State Street (STT) decided to provide support to their stable value funds in the face of potential losses. The bad news is that they had to.

Here is what they said in their 8-K and referred to in their recent conference call:
"In some very limited circumstances, and consistent with applicable regulatory requirements, we may compensate investment pools for all or a portion of the pool’s losses even though we are not statutorily or contractually obligated to do so. For example, during the fourth quarter of 2008, we elected to provide support to stable value accounts managed by SSgA."
They go on to provide a little detail:
"...we elected to purchase approximately $2.5 billion of securities from these accounts that had been identified as presenting increased risk in the current market environment and to contribute an aggregate of $450 million to the accounts to improve the ratio of the market value of the accounts’ portfolio holdings to the book value of the accounts. This resulted in a fourth quarter net charge of $450 million. In addition, in January 2008, we contributed $160 million to the accounts."
So that would be a total of $610 million that State Street pumped into their stable value funds.

Stable value funds generally invest in conservative instruments and guarantee principal as well as a modest rate of return. In the event the underlying investments decline in value such that it would reduce the value of the fund below the guaranteed amount, the shortfall is generally covered by insurance contracts ("wrappers") held by various third parties. Some of the investments held by the State Street funds must have had a toxic odor to them as some of the insurers opted to (legally) bail on their obligations. To quote the 8-K again:
"These financial institutions have the right, under certain circumstances, to terminate this guarantee with respect to future investments in the account. During 2008, the liquidity and pricing issues in the fixed-income markets adversely impacted the market value of the securities in these accounts to the point that the third-party guarantors considered terminating their financial guarantees with the accounts."
That's right, the guarantors can demand that the fund hold higher quality investments or they will decline to continue insurance. I sincerely hope this serves to restrain stable value fund managers and discourage them from reaching for yield at the expense of taking on too much risk.

I applaud State Street for making their stable value fund investors whole. Another firm may not be so generous and concerned with maintaining their reputation.

Has anyone run into problems with their stable value fund yet? Let us know in the comments.

Disclosure: none

Other posts by TradeRadar on stable value funds and 401k plans:

Comments

Popular posts from this blog

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position. This first post in the series starts at the beginning: getting good investment ideas. Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets. As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street profess

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas. Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing wh

Interactive Ads - Google one-ups Yahoo again

Google's ( GOOG ) press release describing the expansion of a beta program for what are being called Gadget Ads has again shown that Google is unparalleled at melding technology and advertising to benefit its bottom line. Gadget Ads are mini-web pages or "widgets" that can be embedded within publisher pages. I have written in the past on Yahoo's ( YHOO ) Smart Ads and how, by more precisely targeting site users and adjusting ad content accordingly, they provide a much desired evolution of the banner or display ad format. Though Smart Ads and Gadget Ads are not really the same, I think it is fair to say that Google has seen the challenge of Smart Ads and has chosen to leapfrog Yahoo by rolling out its own update to the display ad format. The evolution of the Gadget Ad -- One of the trends on the Internet over the last year or so involves software developers creating "widgets" which can be hosted within web pages and blogs. Widgets can be pretty much any