Sometimes, slow and steady does win

December 04, 2005|By JAY HANCOCK

Harvard Business School will never do this as a case study, but I see a morality play in Baltimore's comeback as a global financial center.

Humble, honest burg sticks to knitting, avoids scandal and incurs doubt only to have its worth rewarded in the end. That's the story.

The grand finale could have come last week, when Legg Mason closed on a deal making it the fifth-biggest money manager on the planet, with more than $800 billion under the hood.

Someday, around 2015 or so, if it enjoys great prosperity, the economy of Australia will be worth that much.

Nobody, save perhaps Legg Mason skipper Chip Mason, would have predicted this a few years ago.

Alex. Brown, Baltimore's investment bank jewel, disappeared after 1997. Insurer USF&G floated into the maw of the St. Paul Cos. in 1998.

The bogus tech-stock boom of the late 1990s found Legg Mason and mutual fund house T. Rowe Price trailing rivals and identified as next in line for takeover fodder. Baltimore's two-century legacy of capital management, sprung from wealth deposited by the B&O Railroad, looked headed the way of the Maryland tobacco farmer.

But, as always happens in the best storybooks, flashy sleaze and faithful diligence earned their just and contrasting rewards.

Legg Mason's takeover of Citigroup's $400 billion asset-management business would never have happened without the Wall Street scandals that began in 2001.Had Citigroup's Jack Grubman not peddled compromised stock advice, had WorldCom and Enron trouble not engulfed Citi, had Citi not paid $4 billion-plus in settlements - then Chip Mason wouldn't have done the crowning deal of his career.

Citigroup Chairman Sandy Weill was first in line to buy the company's poorly performing money-management arm.

Weill told the Citigroup board last spring he wanted to acquire the division, The New York Times has reported.

Any other day they would have said, "Fine," bought an expensive "fairness opinion" from cronies across town, glossed over the screaming conflicts of interest and done the deal. But they couldn't. Not just after emerging from muck that was impressive even by Citi's standards.

They had to do something about money management, however. The division was floundering - not least because it had bought stocks recommended by Citi's analysts.

Citi's board also wanted to eliminate the ethically treacherous temptation of pushing Citi brokers to sell Citi mutual funds at the expense of better products.

Legg Mason had the reputation, balance sheet, ambition and competence to step in. For years Chip Mason had been building the firm's money-management capacity. The firm wasn't squeaky clean during the 1990s madness, but its missteps were minor and isolated.

Word of the Legg-Citi deal leaked in June; it closed on Thursday. Baltimore's status as a "major minor" money center along with Boston and Charlotte is intact, thanks also to the positive post-bubble fortunes of mutual fund house T. Rowe Price, venture capital powerhouse New Enterprise Associates and numerous smaller shops that make up the city's financial talent.

Does it matter beyond bragging rights? Absolutely. Legg officials wouldn't say last week how many of its 2,000 Baltimore-area employees remain with the firm after Citi took over its brokerages as part of the deal. But Legg's local employment should approachthe 1,500 workers Alex. Brown had here before it was sold. The 300 brokers aren't going anywhere anyway, and neither, apparently, are 300 Baltimore employees of Legg's capital markets group, sold to Stifel Financial.

These are smart, highly paid people whose salaries finance Pratt Street bustle and spin economic benefits across the economy.

Is this the right deal for Legg? Can it work and prolong Baltimore's capitalist expertise?

It looks promising. As more and more of the world's companies go "virtual," subcontract their operations and concentrate on marketing, Legg and Chip Mason again buck the trend. They are shedding the marketing wing - the brokers - and focusing on money-management substance.

And substance - attention to fundamentals, not stinting hard work - is what Chip Mason, Bill Miller and the other philosopher-kings at Legg eat for breakfast. How's this for substantial? Legg stock worth $1,000 in 1990 is now worth $60,000 or so, counting reinvested dividends.

Think of it as "the Oriole way" of money management. Now if only Miller and Mason, rumored to be interested in buying the baseball team, could bring back the Oriole way to the Orioles. That would be good for Baltimore, too.

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