Credit crisis whips U.S. asset managers, stocks slide

By Muralikumar Anantharaman

BOSTON (Reuters) - The U.S. financial crisis spread from Wall Street to the conservative investment hub of Boston on Thursday, pummeling shares of State Street Corp (STT.N), forcing Putnam Investments to shut a fund and sparking record outflows from money-market investments.

"We are seeing a ton of panic," said Conrad Gann, president of TrimTabs Investment Research, which tracks money flowing into and out of mutual funds. "It is not just the retail investors who are scared. It is the pros who are scared."

Facing demands by investors to withdraw their money, Boston-based Putnam said it shut a $12.3 billion money-market fund, adding to the nervousness over a credit crisis that is giving Wall Street its most dramatic transformation since the Great Depression.

State Street Corp, one the world's biggest institutional money managers, shed more than half of its value at one point on Thursday, tumbling as much as 55 percent and wiping out as much as $15.4 billion in market capitalization on concern over portfolio losses and fears it may need to raise capital.

"There are no safe havens right now," said Anthony Conroy, head trader for stock brokers BNY ConvergEx Group in New York.

U.S. asset managers were already on edge after the asset value of one of the oldest and biggest U.S. money-market funds slid on Tuesday below the amount investors had put into it.

News that shares of the Reserve Primary Fund, whose New York parent pioneered the money-market fund industry, were worth only 97 cents -- below the crucial $1-a-share threshold -- sparked a flight of cash from the traditionally safe $3.5-trillion money-market fund industry.

More than $89.2 billion flowed out of money-market funds on Thursday alone, a one-day record, according to iMoneyNet, an industry research firm based in Westborough, Massachusetts. That compared with $89.4 billion in outflows in the week through Tuesday.

Outflows are shrinking the size of an industry that is already suffering from turmoil in stock markets. Figures provided by the Investment Company Institute, a trade body, showed that assets of money-market mutual funds declined by $169.03 billion to $3.4 trillion in the week through Wednesday.

'GUILT BY ASSOCIATION'

State Street said it does not have plans to raise new capital, had ample liquidity and that shares in its money-market funds had not fallen below $1.

The statement helped pare losses in its shares. The shares recovered further towards the close of trading as the market rallied, ending down 8.9 percent at $59.

Near the headquarters of State Street Corp, a 216-year-old banking icon in the heart of Boston's financial district, workers let off steam at nearby bars the "Good Life" "J.J. Foley's" and "Kingston Station", some expressing concern over their careers but declining to be quoted for this story.

Other firms also sought to reassure investors that they had little or no exposure to troubled U.S. financial firms such as Lehman Brothers Holdings Inc LEHMKQ.PKLEH.N, which filed for bankruptcy protection on Monday, or insurer American International Group (AIG.N).

The Bank of New York Mellon Corp (BK.N) said it had restructured a $22 billion institutional cash fund to minimize losses to clients from holdings of Lehman Brothers assets. Its shares closed down 3 percent at $32.25, recovering after falling as much as 35 percent earlier.