Legg A Model For How To Face Up To Mistakes

April 15, 2009|By JAY HANCOCK | JAY HANCOCK,jay.hancock@baltsun.com

It's a shame the rest of American finance can't clean itself up like Legg Mason did. If Wall Street could confess to terrible losses and sweep them out the door the way the big Baltimore money manager did, we might be closer to ending the recession.

Stage by painful stage, Legg bailed out its money-market customers for a total of $2.3 billion in losses on paper linked to mortgages and other funky bets. The final junk got dumped into the recycling bin two weeks ago, when Legg disposed of $300 million in debt issued by a "structured investment vehicle" for $49 million - a paltry 16 cents on the dollar.

True, if Legg had sold its SIV paper a year ago, the damage would have been far less. True, a huge refund from the Internal Revenue Service was incentive for Legg to clean the books before the end of March. True, Legg's situation is very different from that of Citigroup, Bank of America and other companies sitting on the financial equivalent of EPA Superfund sites.

But the larger lesson is to face mistakes and get on with life. Now Legg can return to running its business of making (instead of losing!) money for its customers. Given the recent dismal performance of Legg's fund jockeys, the fewer distractions, the better.

"It was the right thing to do to get this out of the way," says Matt Snowling, who follows Legg's stock for FBR Capital Markets. "It was hanging over their heads. This puts it to rest."

Like many investment firms, Legg runs super-safe funds for clients who want to park their cash and earn whatever short-term money markets are paying. At least they're supposed to be safe. Legg lent clients' dough to funds investing in subprime mortgages and other dicey stuff, and you don't need an MBA in finance to figure out what happened.

Other firms - Charles Schwab, Janus, Morgan Stanley - put clients into SIV paper. But few if any got whacked as badly. Legg and the other firms couldn't let customers take losses without breaking an implicit pledge and ruining their reputations, so they had to come to the rescue.

Legg's approach to financial poison paralleled the attitude of Wall Street, distressed homeowners, investors and the rest of America. After the first shocking declines - say, 50 percent - the firm couldn't bring itself to realize a loss and dump the assets. But they kept falling and falling.

For Legg, "capitulation" - the moment investors become so disgusted they want out at almost any price - came at 16 cents on the dollar. It's a testament to how little it takes to produce "good" news these days that Credit Suisse analyst Craig Siegenthaler had estimated Legg's SIV losses would be even worse.

Like the stock market, Legg shows signs of a comeback. Its stock closed above $18 yesterday, up from close to $10 last month but down from about $65 a year or so ago. Star manager Bill Miller is beating the S&P 500 so far this year. But getting back on track won't be that easy. Thanks to market declines and clients yanking their money, Legg's funds under management have plunged to around $600 billion from $1 trillion.

Ironically, the firm that built its reputation as a stock-picking house is now largely a bond company. Western Asset Management, Legg's fixed-income division, now holds 70 percent of assets under management. For that reason a sustained stock market rally won't help Legg as much as it once might have.

Western is interested in participating in the government's "public-private" program to buy toxic mortgage assets from Citigroup and the rest, Legg spokeswoman Mary Athridge said. That could potentially make a lot of money for Legg and clients as well as promote healing on Wall Street.

But first the banks must mimic Legg: Mark the assets down to pennies on the dollar. Admit (more) huge losses. Leave the junk at the curb.

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