During the last real estate collapse, in the early 1990s, I remember a few firms shoring up their money-market mutual funds so they wouldn't "break the buck." Now we're seeing it again.
Money-market funds are supposed to invest in short-term, high-grade paper so that they don't lose any investors' principal. Their share price is supposed to never go below $1 - unlike shares of other mutual funds, which fluctuate based on the underlying value of the investments. But Legg Mason seems to have bought some poorly performing paper and is injecting $100 million of its own money into one unidentified fund, so the share price doesn't go below $1. The fund in question is an institutional fund, not a fund involving retail investors.
Legg's Securities and Exchange Commission filing doesn't say anything about mortgages, but Bloomberg reported that the fund in question bought structured investment vehicles, many of which have gotten in trouble by owning mortgage-backed securities.
From the Legg filing:
"As discussed above in Note 10 of Notes to Consolidated Financial Statements, in November 2007 we entered into arrangements with a large bank to provide letters of credit ('LOCs') for an aggregate amount of approximately $238 million for the benefit of two liquidity funds managed by one of our subsidiaries. ... In addition, in October 2007 we invested $100 million in another liquidity fund that a subsidiary manages in order to provide additional liquidity support to the fund. We may elect to provide additional credit or other support to liquidity funds managed by our subsidiaries if we deem this action necessary and appropriate in the future."