Actions more important than words at Legg

The Baltimore Sun

Legg Mason CEO Mark R. Fetting is "gratified to see some daylight on the horizon." There is "some performance improvement" in Legg's mutual funds, he told analysts on yesterday's conference call. "The fundamentals are encouraging."

But just in case, Legg is raising $1 billion in emergency capital. Another $1 billion - on top of the $1.25 billion it raised by selling convertible debt to buyout giant KKR in January.

Watch what Fetting does, not what he says. It's nice that he thinks markets may be recovering from the subprime mortgage disaster.

Other financial bosses are saying the same thing. But the rainy-day cash about to land in Legg's treasury says he knows there's significant risk he is wrong.

Daylight wasn't what Wall Street saw. It hammered Legg's shares down more than $6 to close near a four-year low yesterday. The Baltimore company, now one of the globe's biggest asset managers, lost more than twice as much as analysts expected in its latest quarter.

Customers yanked $24 billion from Legg's funds for the period while putting in only $5 billion. The firm won't say which exits were most clogged, but Legg Mason Value Trust and other funds supervised by star manager Bill Miller continue to suffer outflows even though performance has improved in recent weeks.

The firm's Private Capital Management arm, run by Bruce Sherman, appears to be getting shellacked. Legg had to write off $151 million in management-contract values because wealthy clients fired Sherman.

(This may unfairly single out Sherman. Because of accounting rules we don't need to belabor, when small investors desert Miller's and other funds you don't get a similar write-down. But dollar-for-dollar those defections are just as harmful - or more so if fund fees are higher.)

Lots of rival mutual funds had bad quarters, Fetting said. Miller has done better in recent weeks. "We've had candid discussion," with poorly performing managers, the CEO said. "They are mentally aware of it and focused on improving those records." Sherman isn't just focused; he's "focused laser-like" on improvement, he said.

OK. But lagging stock funds aren't even Legg's biggest worry.

The company and its clients still own billions of dollars in debt issued by "structured investment vehicles" that bought mortgage bonds and other iffy credit instruments. Legg has already used millions of its shareholders' money to rescue funds that bought SIV paper. It may be on the hook for more losses if SIV debt it sold to Barclays goes bad.

In recent weeks Legg wrote down millions in new SIV losses -- after the mid-March government Bear Stearns rescue that everybody says restored stability to the credit markets. Legg's balance sheet could well take new damage, although its exposure to funky credit is tiny compared to what Bear's was.

Fetting's cautious optimism is widely (but not universally) shared. No important financial company has collapsed in recent weeks. None is likely to do so now that the Fed has shown it will directly prop up investment banks for the first time since the Depression. The yield gap between commercial and government debt has narrowed, indicating lenders are getting back in the game.

Everybody's exhaling and hoping Bill Miller was right when he wrote last month that he thinks "by far the worst is behind us."

A few ugly facts, however, haven't changed. People continue to miss mortgage payments in huge numbers. Home prices are still falling in many parts of the country. The nation's employers are shedding jobs, which could increase homeowner stress.

Yesterday Fannie Mae, the huge mortgage financier, said that it expects "severe weakness in the housing market to continue in 2008" and that this will "lead to increased delinquencies, defaults and foreclosures on mortgage loans."

Sorry if Fetting's glimmer on the horizon is kind of hard to see.

He likes metaphors. As an outdoorsman, he told analysts yesterday, he knows that reaching the mountaintop isn't the end of the expedition. (Legg Mason's stock chart doesn't look like a mountain to me, but never mind.) You can't let your guard down just because you're "at or near the summit with the worst of our elevation behind us," he said.

Enjoy the view, Legg Mason. Take a slug of water. But don't jettison the oxygen tanks and grappling hooks just yet.

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