Legg Mason Takes Hit over Money Markets

The company will take a $318 million charge this quarter after bolstering three of its money market funds.
Stephen TaubSeptember 19, 2008

Legg Mason Inc. has announced it will incur a $318 million noncash charge in the current quarter to date after it took additional steps to support three money market funds.

The company amended two existing capital support agreements (CSAs) in order to make up to an additional $350 million in capital contributions to one fund upon certain events relating to certain asset-backed commercial paper (ABCP) securities in the portfolios. In a second fund, the company established a CSA under which it will make up to $20 million in contributions if some of the ABCP in the portfolios falls short.

In a third fund, the company has acquired two letters of credit that effectively expand existing support for two ABCP securities by about $260 million as required by a ratings agency to maintain the fund’s AAA rating, reflecting recently revised ratings requirements, the company explained. Legg Mason stressed it has fully collateralized each obligation.

“Right now, financial markets are operating under severe stress,” said Mark R. Fetting, president and chief executive officer.

This has been an historic week for money market funds. At least two — the Reserve Primary Fund and the $22 billion BNY Institutional Cash Reserves fund, run by Bank of New York Mellon Corp. — broke the buck, meaning the per-share value fell below $1, an extremely rare event. And Putnam Investments closed its $15 billion Prime Money Market Fund because of “significant redemption pressure.”

As reported Thursday, at least one company is breathing a sigh of relief: PG&E Corp., which until recently was invested in the Reserve Primary Fund. In an interview with, Chris Johns, the company’s senior vice president, CFO, and treasurer, said the California power company had the “good fortune” to spot the Lehman connections there, and “we pulled out before the issues” hit and the Reserve Fund broke the buck. Johns credited his assistant treasurer, Nick Bijur, with making the catch.

Earlier in the week, the top accountant at the Securities and Exchange Commission rushed out an accounting “clarification” aimed at allaying a potentially huge fear among banks: that providing financial support to money-market mutual funds could require that those funds appear on the banks’ balance sheet.

“[B]ank support of money market mutual funds generally does not result in a requirement to present the fund on-balance sheet,” the SEC’s office of the chief accountant said in a release.

However, as fears of a modern-day run on the bank turned into reality, the Treasury Department realized an even larger measure was needed. So on Friday, it announced that it had established a temporary guaranty program for the U.S. money-market fund industry. The pool, known as the Exchange Stabilization Fund, provides up to $50 billion to guarantee payments if the net asset value of money market funds falls below a dollar.

In effect, for the next year, the U.S. Treasury will insure any publicly offered eligible money market fund — both retail and institutional — that pays a fee to participate in the program. Investors in a money-market mutual fund with a net asset value that falls below the dollar mark would be notified that their fund triggered the insurance program.

A Legg Mason spokeswoman confirmed to that most of the firm’s money market funds — except its enhanced cash funds — qualify for the insurance.

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