Bank of New York Mellon Corp., which has spent $731 million to prop up money funds, might face $313 million in new costs to cover losses from investments in debt issued by bankrupt Lehman Brothers Holdings Inc.
BNY Mellon had the "additional potential exposure" as of Oct. 31 if the Lehman-issued debt and certain other securities were assigned no value, the New York-based company said in a filing with the Securities and Exchange Commission Friday. BNY Mellon considered the Lehman debt worth 13 cents on the dollar as of Sept. 30, the filing said.
BNY Mellon, the world's largest custodian of assets, was one of many firms that took steps to cushion its money-market funds because of debt issued by Lehman. Third-quarter earnings fell 53 percent because BNY Mellon entered support agreements to bail out 10 funds holding Lehman debt.
"Future realized support agreement charges will principally depend on the price of Lehman securities, fund performance and the number of clients that accept our offer of support," BNY Mellon said in the filing.
The $313 million in possible costs include mainly Lehman debt, and include some debt linked to structured investment vehicles, according to the filing. The figure is an estimate rather than an actual expense. If required, BNY Mellon could take any costs in the fourth quarter or later, said spokesman Ron Gruendl in Pittsburgh.
This year, the company has recorded $731 million in support-agreement costs with the funds, equal to 38 cents a share. BNY Mellon has earned $1.18 per share so far in 2008, and is expected to have a profit of 73 cents in the current quarter, excluding certain costs, according to a Bloomberg survey of 18 analysts.
Losses on Lehman debt sparked a crisis in the money-market industry after the $60 billion Reserve Primary Fund in September became the first money fund in 14 years to fall below $1 per share, the purchase price for investors.
BNY Mellon disclosed that it paid a $250,000 fine to the Financial Industry Regulatory Authority, the Washington- based self-regulatory agency known as FINRA, over the sale of auction-rate securities.
BNY Mellon has agreed to buy back auction-rate securities with a par value of about $20 million from certain buyers who purchased them between May 31, 2006, and Feb. 28, 2008, according to the filing.
BNY Mellon said it did not admit to or deny FINRA's findings that the company used marketing materials that were "not fair and balanced."
Auction-rate securities are long-term bonds with interest rates that are reset every 7, 28, or 35 days through a dealer-run bidding process. The $330 billion auction-rate securities market collapsed in February after broker-dealers stopped acting as buyers of last resort.
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