Baltimore's Legg Mason Inc. said late yesterday that it lost $517 million by selling its largest holdings in troubled asset-backed securities, but the move helped the money manager wipe out a significant portion of its exposure to the risky investments.
Yesterday's action is the latest step the company has taken during the past year to stem potential losses in money-market funds exposed to so-called structured investment vehicles.
SIV-issued debt, some backed by mortgage-linked securities, have plummeted in value amid the credit turmoil. SIVs were popular investments for money funds looking to increase yields but proved riskier than managers anticipated.
Reflecting the sale announced yesterday and costs associated with previously announced support, Legg expects to take a pre-tax charge of $1 billion in the quarter ending Dec. 31.
Legg sold $1.7 billion of its entire holdings in Axon Financial, cutting its SIV exposure by 43 percent. The company's SIV exposure in its money market funds is now $1.4 billion, down from $10 billion on Oct. 31, 2007. Legg's money market funds carry about $167.1 billion in assets.
Neither the money funds nor shareholders incurred any loss in the latest transaction, the company said.
"We've been steadily working through the SIV situation for over a year, and we're in a position ... where we have ample cash to cover all remaining SIV exposure," Legg Chairman and Chief Executive Officer Mark R. Fetting said during a conference call with analysts.
The company, which raised additional capital through debt and stock sales this year, said it has $2 billion in cash beyond what it needs to operate its business.
"Market realities are challenging, but we will continue our process," Fetting said. "We'll continue to weigh all our strategic options and work toward a final resolution of the SIV situation on behalf of our clients, our funds and Legg Mason shareholders."
Legg sold its Axon securities for 30 cents on the dollar, which excludes tax benefits from the sale, Fetting said.
"Let's be clear, we don't like taking a loss," he said. "When we looked at the risk going forward ... our view was, in light of the severity in the market, uncertainty of how long it will take to work through this, [we thought] it would be wise for us to take some risk off the table."
After adding in taxes and operating expenses, the company will take a $632.5 million charge, or $4.48 per diluted share.
Legg's recent profits have been hurt by costs to shore up money market funds invested in SIVs. It reported three consecutive quarterly losses.
Since Legg began supporting its affected money market funds last year, the company has taken an after-tax loss of $1.3 billion, or $9.10 a share.
Yesterday's announcement was made after financial markets closed. Legg shares lost $1.74, or 8.7 percent, to close at $18.17 yesterday. Legg stock is down nearly 75 percent since the beginning of the year.