Legg Mason to bail out money-market funds

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Legg Mason will put up $1.1bn in cash and guarantees to bail out two of its money market funds that were coming under pressure from their asset-backed
commercial paper investments, in the latest of such bail-outs triggered by the credit crisis.

The move takes the tally of US money market and cash fund bail-outs to more than $4bn, as parent companies step in to prevent their funds from “breaking the buck”, or falling below the $1 a share value.

Legg, one of the world’s largest money managers, stressed on Friday that none of the funds’ shareholders would incur any losses as a result of its action. It said it expected the fund rescues to cost it $89.7m in the quarter ending December 31. The bail-out is in the form of a liquidity injection, and underwriting of the value of underperforming securities.

The group said the move would almost halve Legg’s total exposure to Structured Investment Vehicles (SIV) paper – to 3.2 per cent of the total $164bn that Legg held in liquid investments such as money market and short-term cash funds.

Both funds are managed by Legg’s fixed-income unit, Western Asset Management. One, the CLIF Canadian dollar-denominated liquidity fund, is domiciled in Canada. Legg will buy from it $99m in securities issued by Canadian ABCP issuers. That fund a few months ago received a $238m line of credit from Legg when it became apparent that the securities’ value was falling.

The fund will receive $890m cash in exchange for transferring certain securities to Barclays Bank. Legg will be responsible for any loss incurred by Barclays on the securities – and benefit from any gain – until the SIV paper’s maturity date in November 2008. Legg is also buying directly $132m in securities from the fund.

The second fund, Legg Mason Western Asset US dollar liquidity fund, is domiciled in Dublin and sold mostly to UK and European investors.

Chip Mason, the chief executive of Legg, said: “This action is consistent with our ongoing efforts to reduce the ABCP exposure in our liquidity funds in the light of current stresses in the credit markets. The actions we have taken today have meaningfully reduced one fund’s ABCP holdings and essentially eliminated the other fund’s holdings....we will continue to monitor our liquidity funds carefully and may elect to take additional action in the future if we deem it appropriate.”

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