State Street Corporation (STT), the nation’s largest institutional money manager, could face damages tied to subprime investments that reach as high as $7.8 billion — more than 12 times the $618 million it set aside in January to cover legal costs tied to its subprime mortgage exposure. A group of institutional investors, led by Prudential Financial Inc. are suing the Boston-based company, alleging that the money manager misled investors and inappropriately placed investor assets into structured investments backed by subprime mortgages. Bloomberg reported Thursday morning that the value of subprime-related assets on its books fell to $6.1 billion at the end of 2007, versus $13.9 billion on June 30 of last year — leaving the upper end of State Street’s exposure at $7.8 billion. That figure, of course, is the cieling and not necessarily the likely damage award; nonetheless, most expect final legal losses to be above the current reserve set aside at State Street, and Bloomberg’s report suggested damages are likely at least come in at $1 billion. From Bloomberg’s coverage:

The [current] reserve is a “lowball,” Wagner said. “We are talking very large in terms of damages,” though they’re unlikely to reach as high as the ceiling. “To the extent plans were misled into purchasing something they were not authorized to purchase, they may have a fiduciary obligation to sue,” said Wagner, who isn’t representing the investment manager or plaintiffs. “It’s sue or be sued.”

Disclosure: The author held no positions in STT when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.