NEW YORK — State Street Corp. said Thursday it sold $11 billion of mortgage and asset-backed bonds from its investment portfolio, reducing its risk and strengthening its capital ratios as banks prepare to meet new capital standards.
Barclays Capital and Goldman Sachs bought most of the securities, according to people familiar with the transactions. Barclays bought at least some of the asset-backed securities in the deal and Goldman Sachs bought about $6 billion in non-agency mortgage-backed securities in the sale, almost all of which were below triple-A rated and containing Alt-A, prime and subprime home loans, according to the sources.
Spokesmen for Barclays and Goldman declined to comment.
State Street, Boston, one of the largest asset custodians and money management firms with $20.2 trillion of assets under custody or administration, is expected to take a $350 million loss in the fourth quarter.
The sale confirms two trends that are combining to create increased appetite for riskier assets. Banks holding tainted assets will have to increase their net margins and their reserve capital under new capital guidelines called the Basel III Accords. To avoid this, many banks are expected to start selling their assets rated below AAA. At the same time, low interest rates are encouraging yield-starved investors and money managers sitting on piles of cash to snap up riskier, higher-yielding securities.
Next year is expected to be a big year for sales of toxic assets by banks, said Frederick Cannon, the co-director of research and chief equity strategist for Keefe Bruyette & Woods. Banks have increased their capital bases and reserves enough to absorb some losses on the sales, he said.
Two years after the worst of the credit crisis, prices for non-agency mortgage securities have vastly recovered, fetching anywhere from 70 cents to more than 100 cents on the dollar compared to the 10 cents on the dollar prices being quoted in late 2008, according to Paul Norris, a portfolio manager with Dwight Asset Management, Burlington, Vt., with more than $65 billion in fixed income assets.
"We will see more of these portfolio sales as banks look to adopt Basel III," Norris said.
Gerard Cassidy, an analyst at RBC Capital Markets, said the deal will help State Street improve the risk profile of its portfolio, which had $80 billion available for sale at the end of the third quarter. Unrealized losses in the portfolio peaked at $6.3 billion in the fourth quarter of 2008. As of the third quarter this year, those unrealized losses had declined to $281 million.
State Street said the concentration of AAA-rated and AA-rated issues in its portfolio will rise six percentage points to 88% as a result of the sale.
The sale included $4.1 billion of U.S. non-agency mortgage-backed securities and $3.7 billion of asset-backed securities, plus non-U.S. securities of $2.5 billion and $600 million, respectively.
State Street affirmed its 2010 earnings projections on an operating basis.
Shares traded down 3.6%, to $44.52 in recent trading.