Monday, March 31, 2008

Legg Looking at Solutions to Auction-Rate Problem

Asset manager Legg Mason Inc. announced it is seeking solutions for investors of auction-rate preferred securities issued by seven closed-end funds and expects preferred auctions to continue to fail. However, the company will not promise a resolution will be reached or disclose which solutions are being considered, although they say “any potential solution would be subject to factors beyond Legg Mason’s control,” including market, credit and economic developments.

When the auction-rate market began collapsing earlier this year, investors in auction-rate securities discovered that these so-called “cash alternatives” were actually illiquid, leaving them with more than $300 billion worth of these securities and a higher penalty interest rate.

Affiliates of Legg’s seven closed-end funds have issued approximately $672 million in auction-rate preferred securities, preferred stock or debt instruments. Overall, closed-end funds have issued more than $60 billion in such securities.

Legg Mason blames the failure of auction-rate securities on the current economy and credit crunch but is also careful to add that the failure is not a credit issue related to the actual funds or portfolios. A possible solution for Legg is to restructure the securities so that money-market funds could invest in them. But there are regulatory issues before that option can be considered a possible alternative.

Meanwhile, investors of failed auction-rate securities are already taking action to protect themselves by filing arbitration claims with the Financial Industry Regulatory Authority.

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