Legg takes loss of $195 million

Charge shores up money market funds containing mortgage-backed debt

April 01, 2008|By Paul Adams | Paul Adams,SUN REPORTER

Legg Mason Inc. said yesterday that it will take a $195 million after-tax charge to earnings this quarter to shore up money market funds containing mortgage-backed debt, bringing its total losses on the funds to $279 million for the three months ended March 31.

The Baltimore-based money manager said it will provide as much as $400 million over the next year to cover potential losses, which have grown steadily as the credit crisis has rippled through financial markets.

The support is intended to prevent the value of the money market funds from dropping below $1 per share - a rare occurrence referred to in financial circles as "breaking the buck." If the value drops below $1, investors lose money, something that is never supposed to happen with money funds.

Legg said that while it can't make any guarantees, it is confident in the "overall soundness" of its money market funds.

The latest hit will amount to $1.38 per share for the quarter, and shows the sizable exposure the company's money market funds have to a type of debt considered risky in today's credit climate.

Money market funds have historically been a haven for investors looking for a place to park cash they might need in the short term.

The noncash charge relates to unrealized losses from structured investment vehicles, or SIVs, which issue debt that has lost value as the market continues to worsen for mortgage-backed securities. Some holders of the debt have sold for a loss, making the value of such securities a moving target.

Legg Mason reported a similar $142 million charge March 7. For the quarter, the company has taken approximately $498 million in noncash charges before taxes and other factors. Legg took a similar charge of $91 million in the previous quarter.

Legg officials said yesterday that they have enough cash to deal with the potential losses and are optimistic the bleeding is nearing an end, thanks in part to recent actions by the Federal Reserve to bolster financial markets. However, the company left the door open to future bailouts, if needed.

`Improved tone'

"We are encouraged by the improved tone in the credit markets after the Fed's substantial actions to restore liquidity to the financial system," said Mark R. Fetting, Legg's president and chief executive, in a statement.

"We will continue to monitor market conditions," he said, "and may take additional action if we deem it appropriate."

A spokeswoman said the company has $2.5 billion of cash on its balance sheet, of which $1.1 billion is freely available.

Asset-backed debt

Of the $400 million Legg has pledged to support the funds, up to $250 million will go to support $1.1 billion in asset-backed debt issued by Axon Financial Funding LLC. Axon is a Cayman Islands-based SIV that defaulted in November.

The remaining $150 million relates to $354 million in asset-backed debt issued by Issuer Entity LLC, which is similar to an SIV and is a successor to Ottimo Funding Ltd. Ottimo, created by Stamford, Conn.-based Aladdin Capital Management, was forced to sell off its assets after it was unable to refinance debt last year.

Legg said in a regulatory filing that about 2 percent of its $176 billion of assets under management in its money-market and cash funds had exposure to SIVs.

Of that 2 percent, 0.4 percent relates to bank-sponsored SIVs.paul.adams@baltsun.com

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