State Street says money market funds stable

Seeking to soothe investor jitters, State Street Corp. said Thursday that it will not have to consolidate conduits and that its money market funds are stable.

Shares of the Boston-based investment services company slid $5.75, or 9 percent, to close at $59. The shares hit a low of $29.09 earlier in the session, a level not seen since 1998.

State Street said in a statement that it would have ample liquidity even if it needed to consolidate, as it raised $2.8 billion in equity capital in June. The financial services firm does not currently have plans to raise more capital.

State Street also said that its Global Advisors' money market funds have never fallen below a net asset value of $1. Additionally, these funds do not have any unsecured exposure to the troubled firms of American International Group Inc., Lehman Brothers Holdings Inc., Merrill Lynch & Co., Washington Mutual Inc., Wachovia Corp. and Morgan Stanley.

Money market funds are supposed to be conservatively invested and almost as safe as cash. Withdrawals from money market funds have become one factor in the global tightening of credit, as investors and banks hoard their cash.

In addition, State Street said it does not hold any equity positions in unaffiliated financial institutions.

State Street's move to reassure investors follows a massive pullout from large retail fund Reserve Primary Fund. The run on that fund earlier this week caused its assets to plunge in value by nearly two-thirds and fall below $1 for each dollar invested.

Fellow Boston-based firm Putnam Investments on Thursday closed a $15 billion money-market fund and announced plans to return investors' money after institutional clients pulled their cash despite the fund's lack of exposure to battered financial firms like Lehman Brothers, which filed for bankruptcy protection on Monday.

When a fund suffers a sudden rush of orders to pull out money, fund managers must sell assets — typically at a loss when it must be done quickly, and especially amid this week's market turbulence.

On Thursday, the Federal Reserve and other major central banks injected as much as $180 billion into global money markets in an effort to stymie the ongoing credit crisis. The Fed also added another $55 billion in overnight loans, as investors remained concerned about banks and other companies' ability to borrow money.

Investors have also worried that State Street might have to take a writedown after the company noted in its second-quarter filing with the Securities and Exchange Commission that its unrealized losses climbed to $3.31 billion from $3.16 billion in the previous quarter.

Deutsche Bank analyst Mike Mayo subsequently downgraded his rating on State Street to "Hold" from "Buy," and cut his target price on the stock by $8 to $72.

"We think recent capital market dislocations increase State Street's risk," wrote Mayo in a note to clients. He estimates that every 10 percent decline in the broader market, on average, hurts State Street's earnings by 2 percent.