Oct. 23 (Bloomberg) -- Joseph “Jay” Hooley, the 23-year State Street Corp. veteran named yesterday to succeed Chief Executive Officer Ronald Logue in March, will have to clean up $3 billion in unrealized losses while steering the largest money manager for institutions through a series of lawsuits.

“Jay Hooley certainly knows the business well,” Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine, said in an interview. “The main challenge for him is to navigate” the problems created by the credit crisis.

State Street this year cut its quarterly dividend, halved bonuses and raised $2.5 billion to repay government aid and prop up capital depleted by mark-to-market losses in proprietary trading. The company faces a possible lawsuit from the U.S. Securities and Exchange Commission over bond funds that lost money on mortgage-backed securities, and was sued this week for $200 million by California for allegedly defrauding two state pension funds through unfair fees.

Logue, 64, led State Street through the credit-market crisis that began with the collapse of the subprime-mortgage market in 2007 and resulted in losses in the company’s investment portfolio and commercial paper programs. The crisis culminated in a record $3.3 billion loss for State Street in the second quarter as the company wrote down the value of debt investments.

Logue, who has presided over a 4.9 percent drop in State Street’s share price since he took over as CEO in June 2004, will stay on as non-executive chairman of the Boston-based company’s board of directors until Jan. 1, 2011, State Street said yesterday. Hooley, 52, was elected to the board of directors effective immediately.

Unrealized Losses

State Street on Oct. 20 lowered its estimates for 2009 operating revenue and earnings, causing shares to decline the most in five months. Third-quarter earnings rose 8.1 percent to $516 million after it cut jobs and the stock-market rebound bolstered fees. Earnings last year were hurt by a $200 million provision the Boston-based made to cover potential losses from loans to bankrupt Lehman Brothers Holdings Inc.

Unrealized losses in State Street’s investment portfolio decreased to $2.99 billion, after taxes, from $4.75 billion at the end of the second quarter, and from $6.32 billion as of Dec. 31. Unrealized losses represent what State Street would lose if it were forced to sell the securities in its investment portfolio at current market prices.

Thomas McCrohan, an analyst at Janney Montgomery Scott LLC in Philadelphia, said in an interview he expects the company may write down more unrealized losses on its balance sheet and build up litigation reserves at the end of this quarter.

Rising Through Ranks

“Typically, this is an opportunity for a company to clean up its balance sheet and give the incoming CEO a clean slate,” McCrohan said.

Hooley, a Massachusetts native and graduate of Boston College, joined State Street in 1986. He has served as vice chairman since 2006 and chief operating officer since 2008. He is responsible for the company’s asset-servicing businesses worldwide.

Hooley ran National Financial Data Services, a joint venture between State Street and Kansas City-based DST Systems Inc., from 1988 to 2000. He shifted in 2000 to managing the parent company’s global-investment-servicing division.

“Ron and Jay have worked together for many years, so it’s a non-event from a business-continuance point of view,” said John Hailer, CEO of Natixis Global Asset Management LP, the Boston-based unit of French bank Natixis, and a customer of State Street’s.

State Street provides record-keeping and transaction- processing services for funds managed by Natixis.

Talking Hockey

“Jay is a terrific guy and will be a terrific CEO,” Hailer said. “He’s a guy who can talk about the highest level finance, and who can also sit back and talk about the Boston Bruins just as easily,” he said, referring to the city’s professional hockey team.

Logue, who has bachelor’s and master’s degrees from Boston College, joined State Street in 1990 as senior vice president and head of investment service for U.S. mutual funds. He was named chief operating officer in 2000 and president a year later.

Logue oversaw the $4.2 billion purchase of Investors Financial Services Corp. in 2007, the company’s largest acquisition. During his tenure, State Street received $2 billion under the government’s Troubled Asset Relief Program in November 2008. In June, it became the first of the program’s original recipients to repay the bailout money in full.

Logue also expanded the company’s proprietary investment portfolio and its commercial paper programs, or conduits, which were hurt by the credit crisis starting in 2008.

‘Too Large’

“I think it’s fair to say the commercial paper programs were too large,” Kevin Conn, an equity analyst at Massachusetts Financial Services Co. who has covered State Street for more than a decade, said in an interview. “But it wouldn’t be fair to say there was a risk-taking culture at State Street.”

State Street is the third-largest custody bank, overseeing $13.3 trillion. Assets under custody grew 46 percent under Logue as of Sept. 30. The amount of money the company invests on behalf of clients rose 45 percent to $1.74 trillion.

The company fell 86 cents, or 1.8 percent, to $45.82 at 11:53 a.m. in New York Stock Exchange composite trading. It has risen 16 percent this year, compared with the 28 percent gain by Standard & Poor’s 15-member index for asset managers and custody banks.

Custody banks keep records, track performance and lend securities to institutional investors including mutual funds, pension funds and hedge funds. The company’s money-management unit, State Street Global Advisors, operates mutual funds and investment accounts for institutions and wealthy individuals.

To contact the reporters on this story: Christopher Condon in Boston at ccondon4@bloomberg.net; Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net.

Last Updated: October 23, 2009 12:13 EDT