Sub-prime hits SSgA

The volatility created by the sub-prime crisis has prompted State Street Global Advisers to establish a reserve specifically aimed at addressing potential legal exposures and other costs.

The announcement came as the company said that its chief executive officer William W Hunt had resigned and would be replaced on an interim basis by the vice-president and head of international operations at State Street, James Phalen.

The company announced this month that it would record a net charge, after taxes, in the fourth quarter of 2007 of $279 million, or 71 cents per share.

It said the purpose of the charge was to establish a reserve to address legal exposure and other costs associated with the underperformance of certain fixed-income strategies managed by State Street Global Advisors, the company’s investment management arm.

It said the move was also aimed at allaying customer concerns about whether the execution of the strategies was consistent with the customers’ investment intent.

State Street said that as a consequence of the unprecedented events in the credit markets over the past six months, the strategies had been adversely impacted by exposure to, and the lack of liquidity in, the sub-prime mortgage markets.

“In aggregate, the reserve will be $618 million on a pre-tax basis,” the institutional said.

“The impact of the net charge, after taking into account the tax effect of the reserve and associated lower incentive compensation cost will be $279 million.”