State Street Lawsuit Damage Well Exceeds Its Reserve Fund

May 8, 2008 2:37 p.m. EST

Boston, MA (AHN) - The $625 million fund set aside by State Street Corporation for lawsuits it is facing over soured subprime mortgage investments may not be sufficient.

Estimates place State Street's potential damage bill to exceed 12 times its reserve fund. The Boston-based firm is the largest money manager for institutions. Prudential Financial, the second largest U.S. life insurer, filed a lawsuit against State Street on behalf of over 200 retirement plans held by Prudential.

Prudential claimed State Street made wrong investment decisions on risky securities. Aside from Prudential's lawsuit, State Street is facing similar cases from three other firms.

The subprime mortgage crisis has caused State Street's assets to tumble down by 56 percent to $6.1 billion by the end of 2007 from $13.9 billion mid-2007. Marcia Wagner, partner at Wagner Law Group which handles retirement fund and employee-benefit cases, said the $7.8 billion loss was State Street's maximum legal exposure.

Wagner told Bloomberg, "They (State Street) allowed bad investments, so they should be attempting to make the plans whole... State Street is quite exposed, especially if one of its affiliates rendered advice or marketed the funds to be something they were not."

Prior to the subprime mortgage crisis, State Street had 26,000 employees in major financial centers across the U.S., Europe, Asia and the Middle East.