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UPDATE: Legg Tries To Sort Out Auction Rate Securities Mess
Dow Jones

NEW YORK (Dow Jones) -- Asset manager Legg Mason said Friday it is urgently trying to generate liquidity for shareholders of seven closed-end funds it manages that collectively own more than half a billion dollars of unsellable auction-rate preferred securities

"Legg Mason is fully aware of the urgency to resolve this situation, and of the uncertainty, frustration and difficulties these failed auctions have caused for shareholders of these securities, and is committed to explore any and all possible solutions that are equitable to both the preferred and common shareholders of these funds," the company said in a press release.

Together, Legg said the funds own about $672 million of the securities.

Closed-end funds are different from their cousins, mutual funds, because they do not continuously offer shares for sale.

Legg (LM) shares fell 2%, to $54.80 after the news.

When running smoothly, the $331 billion market works the following way: An investor such as a corporate treasurer buys auction-rate securities, often municipal bonds but sometimes preferred stock or corporate bonds as well. These have long-term maturities, but act like short-term investments because the holders can sell them at weekly or monthly auctions, when their rates reset. Some investment managers regard them as a cash alternative for investors looking for safe but liquid investments.

Closed-end funds, for their part, issued auction-rate preferred stock and used the proceeds to buy longer-term instruments for common shareholders. This use of leverage, or borrowed money, boosts the yield for common shares in these funds.

"Given the current interest rate environment, the funds' managers currently continue to believe that leverage is beneficial to the overall performance of the funds, even as we anticipate that the preferred auctions may continue to fail," Legg said in a press release.

The problem for issuers and their investors is that the door has recently shut on those investment auctions. Investors, skittish about the unraveling in other parts of the credit market, have sat them out.

The link between auction-rate securities and the disruptions in other parts of the credit market is a complicated one, but it all traces back to the surprise surge in mortgage defaults that started last year.

"At this time we cannot provide definitive timing for a resolution to this issue," Legg said.

Along with Legg Mason, firms such as Eaton Vance Corp. (EV), Nuveen Investments , Calamos Advisors and BlackRock Inc. (BLK) manage closed-end funds that have used the auction-rate market for a source of funding.

  (END) Dow Jones Newswires
  03-28-08 1419ET
  Copyright (c) 2008 Dow Jones & Company, Inc.
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