November 15, 2007 / 12:45 AM / 12 years ago

UPDATE 1-GE suffers bond fund damage, lets outsiders exit

(New throughout, adds details on fund, background)

By Svea Herbst-Bayliss

BOSTON, Nov 14 (Reuters) - General Electric Co (GE.N) said on Wednesday its short-term bond fund ran into trouble amid losses on asset-backed securities and that all its outside investors have liquidated their holdings.

The diversified manufacturing company’s money management arm, GEAM, which oversees the $5 billion GEAM Trust Enhanced Cash Fund, is still invested in the fund, but GE warned last week that it would sell holdings amid tough market conditions.

It allowed the handful of institutional investors who put money alongside GE’s assets to get out first, letting them redeem at 96 cents on the dollar.

GE’s woes mark the latest in a string of problems at short-term investment funds, which are generally considered safe and have become hugely popular with investors since credit market turmoil made many exit other stock and bond funds.

Industry analysts worried that news of more money market fund trouble could unnerve already-anxious investors, leaving them with few options on where to put their money.

GE warned it would soon pull $250 million out of the fund and planned to “begin to sell certain securities held in the Fund which will result in realized losses and likely bring the Fund’s yield to zero.”

The company sent an email to outside investors last week. The fund does not own structured investment vehicles or collateralized debt obligations, but does own mortgage-backed and asset-backed debt, a GE spokesman said.

While GEAM said it expected the fund’s net asset value would always be fairly determined, “any significant future redemption could adversely affect” the fund’s net asset value.

Recently Legg Mason (LM.N), Wachovia WB.N and Bank of America (BAC.N) have all shored up ailing money market funds with their own funds to prevent them from sliding below the dollar-per-dollar-invested level they promise to preserve.

GE’s fund is slightly different because it is an enhanced cash fund and therefore took on more risk and did not promise to preserve what was invested, a GE spokesman said.

Still the announcement made investors nervous.

All outsiders immediately pulled out, the GE spokesman said, declining to say how much money they took with them.

GE’s $60 billion pension fund is overfunded and this month the company said it would raise the pensions of more than 130,000 retirees on Dec. 1. (Editing by Braden Reddall)

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