Fitch Revises State Street's Outlook to Negative on Reserve Charge

CHICAGO, Jan 03, 2008 (BUSINESS WIRE) -- STT | charts | news | PowerRating -- Fitch Ratings has revised the Rating Outlook on State Street Corporation (State Street) to Negative from Stable and has downgraded the bank's Individual Rating to `B' from `A/B.' Fitch has affirmed all of State Street's other outstanding ratings.

This rating action follows State Street's announcement that it will record a $279 million after-tax charge to establish a $618 million reserve to cover legal exposure and other costs related to the underperformance of several of State Street Global Advisors' (SSgA) actively managed fixed income funds, specifically those that contained investments backed by subprime mortgages. Following a review of and discussions with certain customers invested in these funds, State Street determined that the company had potential legal exposure to some of its investors in these funds.

Fitch has downgraded State Street's Individual Rating since operational losses of this magnitude are not consistent with the previous Individual Rating of 'A/B'. Fitch believes that there were deficiencies in the control environment that allowed the potential exposure to develop. Management has instituted a company-wide review process to detect and eliminate any similar weak control issues.

The Rating Outlook revision to Negative indicates the potential negative impact on business volume if customers lose confidence in State Street's risk control capabilities. This risk is highest in State Street's other investment management businesses, though it could potentially affect the servicing business as well. Fitch will monitor future business trends carefully over the intermediate term to determine whether additional rating actions are warranted.

Fitch has affirmed State Street's long- and short-term Issuer Default Ratings (IDRs) and other outstanding debt ratings in light of the company's strong franchise and good earning capacity. Liquidity at the bank level is judged good. While the parent currently has an acceptable level of financial flexibility for its current long-term and short-term ratings, Fitch expects management to accumulate resources at the parent level to be able to deal with any future contingencies.

Fitch has downgraded the following ratings:

State Street Corporation

--Individual to `B' from 'A/B'.

State Street Bank and Trust Company

--Individual to `B' from 'A/B.

Fitch has also affirmed and revised the Rating Outlook on the following ratings to Negative from Stable:

State Street Corporation

--Long-term IDR 'AA-';

--Long-term senior 'AA-';

--Long-term subordinated 'A+';

--Short-term IDR 'F1+';

--Short-term debt 'F1+';

--Support '5';

--Support Rating Floor 'NF'.

State Street Bank and Trust Company

--Long-term IDR 'AA-';

--Long-term deposits 'AA';

--Long-term subordinated 'A+';

--Short-term IDR 'F1+';

--Short-term deposits 'F1+';

--Support '2';

--Support Rating Floor 'BBB+'.

State Street Capital I

State Street Capital IV

Investors Capital Trust I

--Trust preferred securities `A+'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

SOURCE: Fitch Ratings

Fitch Ratings David Spring, +1-312-368-3194 (Chicago) Ken Ritz, +1-212-908-0368 (New York) Media Relations: Kenneth Reed, +1-212-908-0540 (New York)

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