12 times $625 million equals $7.5 billion

That's the total, potential, exposure that State Street faces in light of a law suits already filed against it by several insurance companies for whom they managed retirement funds. No one believes that the verdict will be that high, of course, but that's the maximum as calculated based on the losses suffered by the funds under management as a result of the sub-prime mortgage investments. $625 million, on the other hand, is what State Street set aside late last year in anticipation of these lawsuits. See a discrepancy? Me too.

The lawsuits, under review for class action status, appear to have more than one leg to stand on. The reason is that the suits are filed under the Employee Retirement Income Securities Act (ERISA); why is that important? Well, funds registered under ERISA are designed to be relatively low-risk so as to appeal to individuals looking for retirement-oriented investments. As it turns-out, of course, sub-prime lending isn't all that safe and a lot of people are now faced with the loss of as much as half of their retirement savings. How would you feel or react if that were you? Yea, me too.

State Street, of course, isn't the only one in this position and there will be others hitting the headlines in the coming months. The issue is really the extent to which these fund managers owe a fiduciary responsibility to the individual investors whose money they are ultimately investing. Were these investors properly informed of the risks being taken? Did the fund managers even appreciate the risks themselves? If you're interested in corporate finance, then the next year will certainly be an interesting one to observe. 

Just as in we had Sorbanes Oxley come-about as a result of the scandals earlier this decade, I'm sure that we'll have new legislation and regulation written to avoid such events in the future. It's easy to view this as just a cycle - one that will repeat again, just in a different form with a different name and with different acronyms. What makes this a little more real is the thought of the millions of people whose life savings have been so detrimentally affected by the decisions of so few.