Legg Mason's big Citi deal keeps the hurt on

Posted by: Aaron Pressman on March 7, 2008

Mark Fetting has been president and CEO of Baltimore-based money manager Legg Mason (Symbol: LM) for less than six weeks but what exciting weeks they’ve been! Today, the firm announced yet another write-down to cover for structured investments gone bad in its cash funds. S&P downgraded the shares to “hold” from “buy,” noting that “continuing struggles, combined with tough markets and recent fund underperformance, will continue to adversely affect fund flows and average asset balances.” The company’s shares are off just 2% but they’ve dropped 15% in 2008.

It’s got to be hard any time you succeed the founder of a company in the big chair, especially when that founder was as successful as Fetting’s predecessor, Raymond “Chip” Mason, was for most of his tenure. In 38 years at the helm, Mason built the firm from a small regional brokerage into a money management powerhouse with almost $1 trillion in assets.

Most of Mason’s moves were spot on, buying Western Asset Management, the bond titan, for a song back in the mid-1980s, for example. But Mason’s last move — his biggest by far — hasn’t turned out nearly as well. Swapping his brokerage force to Citibank (C) in return for Citi’s fund division may have seemed like the perfect way to cement his legacy. But Mason and his team struggled to keep investors, many of whom were pushed into the funds by Citi’s various brokerage squads. Now it’s an open market and investors are checking out. Ironically, it’s probably some former Legg Mason brokers, now at Citi, suggesting their clients dump their former Citi funds, now run by Legg.

Adding to Fetting’s woes are problems at the nearly $150 billion of cash funds Legg Mason got from Citi (some are actual money market mutual funds, others are less-regulated imitations). Seems Citi had stuffed many of the funds full of asset-backed securities issued by structured investment vehicles, or SIVs, which in turn were backed by subprime mortgages. Oops. Fully 6% of Legg’s cash business was invested in SIVs last October and that was after the firm had already been selling the stuff as fast as possible. As of the end of February, the SIV exposure was down to 2.2% in cash funds totaling $174 billion.

Fetting & Company will no doubt be working the phones for the next six weeks, trying to complete a turn around that’s grown more difficult and complex in the past six months. Then he can get on with turning around stock fund performance. Legg Mason star manager Bill Miller’s had two bad years in a row and he’s down 19% already this year. It’s quite an initiation for a new CEO,. At least he’ll be battle tested for the next market meltdown.

Reader Comments

Diane Urquhart

March 8, 2008 6:05 PM

Legg Mason Canada had to buy back $101 million of Non Bank Asset Backed Commercial Paper that it had bought for the Western Asset Cdn Money Market Fund, owned by Canadian institutions. This Canadian Non Bank ABCP was sold with "no use" liquidity agreements, where the international banks walked from their liquidity calls due to a uniquely Canadian regulation saying that a complete market disruption was necessary before the banks were obliged to pay cash to the commercial paper hodlers.

As a Canadian, I am happy to see that American-owned Legg Mason did the right thing which is to buy back the flawed Non Bank ABCP from its Canadian money market fund.

The Canadian banks sold asset backed commercial paper into the retail market as savings products. The Canadian style liquidity agreements allowed the international and Canadian bank signatories to walk away from their calls for cash to repay the savers. The Canadian banks are not backing these savings products, and thousands of Canadians are left holding the bag with their houses, children’s education and retirement savings in ruins. See two typical Canadian stories on You Tube at:

http://www.youtube.com/watch?v=c04VLlR1d8g

Diane Urquhart

March 8, 2008 6:22 PM

Legg Mason Canada had to buy back $101 million of Non Bank Asset Backed Commercial Paper that it had bought for the Western Asset Cdn Money Market Fund, owned by Canadian institutions. This Canadian Non Bank ABCP was sold with "no use" liquidity agreements, where the international banks walked from their liquidity calls due to a uniquely Canadian regulation saying that a complete market disruption was necessary before the banks were obliged to pay cash to the commercial paper hodlers.

As a Canadian, I am happy to see that American-owned Legg Mason did the right thing which is to buy back the flawed Non Bank ABCP from its Canadian money market fund.

The Canadian banks sold asset backed commercial paper into the retail market as savings products. The Canadian style liquidity agreements allowed the international and Canadian bank signatories to walk away from their calls for cash to repay the savers. The Canadian banks are not backing these savings products, and thousands of Canadians are left holding the bag with their houses, children’s education and retirement savings in ruins. See two typical Canadian stories on You Tube at:

http://www.youtube.com/watch?v=c04VLlR1d8g

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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