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Legg Mason, Inc. (NYSE:LM)

F2Q09 (09/30/08) 2008 Earnings Call

October 29, 2008 10:00 am ET

Executives

Tim Munoz - SVP and Head of Corporate Marketing and Communications

Mark Fetting - President and CEO

Barry Bilson - SVP

C.J. Daley - SVP, CFO and Treasurer

Analysts

William Katz - Buckingham

Prashant Bhatia - Citi

Daniel Fannon - Jeffries

Robert Lee - KBW

Matt Snowling - FBR

Craig Siegenthaler - Credit Suisse

Hojoon Lee - Morgan Stanley

Marc Irizarry - Goldman Sachs

Douglas Sipkin - Wachovia

Jeff Hopson - Stifel

Operator

Good day, ladies and gentlemen, and welcome to the Legg Mason Quarterly Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).

I will now like to turn the conference over to your host today, Mr. Tim Munoz. Please begin, sir.

Tim Munoz

Thank you, and on behalf of Legg Mason, I'd like to welcome you to our conference call to discuss operating results for the fiscal 2009 second quarter ended September 30, 2008.

This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of facts or guarantees of future performance, and are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those discussed in the statement. For a discussion of these risks and uncertainties, please see risk factors and management's discussion and analysis of financial condition and results of operations in the company's Annual Report on Form 10-K for the fiscal year ended, March 31, 2008, as well as management's discussion and analysis of financial conditions and results of operations in the company's quarterly reports on Form 10-Q.

This morning's call will include remarks from the following speakers, Mr. Mark Fetting, President and Chief Executive Officer; Mr. C.J. Daley, Chief Financial Officer and Mr. Barry Bilson, Senior Vice President of Finance. Gentlemen will discuss Legg Mason's financial results and in addition, following review of the company's quarter, we will then open the call to Q&A.

Now, I'd like to turn the call over to Mr. Mark Fetting. Mark?

Mark Fetting

Thank you, Tim, and welcome everyone. At the close yesterday, if you were to work through basic metrics on Legg Mason, you would list the following: price to assets under management, 0.25%; price to operating revenues, 0.6; price to EBITDA, 2.1; price to book, 0.3 times; cash yield, that is, our cash earnings of this quarter annualized across our stock price 30%.

Many of us find solace in the wisdom of Ben Graham, and intelligent investor. In that work he said the following. "In the depths of a depressed or "bear" market, the average person can see no ray of light ahead and can think only in terms of worse to come. So too, when an individual company or industry begins to lose ground in the economy, Wall Street is quick to assume that its future is entirely hopeless and it should be avoided at any price. The two types of reasoning are similar and equally fallacious" says Mr. Graham.

So I would like to invite to you discuss with myself, Barry Bilson, and C.J. Daley, our results and plans for the future with this backdrop in mind.

As we reported this morning, our net loss for the quarter was $104 million, a very discouraging and disappointing result reflecting $0.74 a share loss. This was on revenues of almost $1 billion and assets under management of $842 billion.

The AUM has declined, in fact, less than our competitors and then held up reasonably well. It reflects the diversity of our asset base and is also a testament to our servicing and portfolio management teams, who have held dozens of conference calls and meetings both on the institutional, individual and retail markets.

Our flows were basically the same. They continue to be outflows, and that's a concern. But if you look at our outflows quarter-over-quarter sequentially, you'll see that they modestly increase. In fact, our equity flows were down by about almost $3 billion. The outflows were lower by $3 billion.

Our fixed income non-liquidity flows were up just about $1 billion and liquidity remained positive, which is interesting in light of competitive results.

What I would like to talk about are four key issues that have emerged as we listened to our shareholders, the analyst community, our employees, and whatnot. Barry will follow as usual and then CJ will hit some specific balance sheet issues that we think are particularly important to underscore.

My first topic is SIVs. We have, as of today, $4.4 billion in face value of SIVs. That is down almost $1 billion from 630 and almost $10 billion when we first started reducing our exposure. That reduction reflects maturities and cash distributions. We are supporting $4 billion of that $4.4 billion, either in credit support or actually having purchased them onto our balance sheet.

Now, $400 million are bank sponsored and paying as expected and, in fact, all of that $400 million will mature within the next 30 days. $700 million we previously communicated was purchased and is on our balance sheet. So really, you should think we have $2.9 billion of liability in our support of SIVs.

Let me point out, we have $2.5 billion in cash, free and clear, beyond what we need to raise to run our business reflecting the capital raises we did in January and May on favorable terms. If you were to take a calculation and assume worst case, what would we have to get? So long as we get anything greater than $0.14 on the $1, we have it covered.

Now, during this quarter, we've supplemented Western's work with third-party experts to scrub thoroughly over 852 SIVs that represent the underlying collateral of these SIVs. As a result, we are now poised to take advantage of the restructuring that are occurring as they occur. Therefore, we are pleased with the options we have. Indeed, optionality is the name of the game.

In sum, we believe we have ample capital and cash to work through these positions as appropriate. I would also like to note that during this time of working through this exposure, which to be clear, we have learned from, and have put in place risk controls to make sure we do a better job on a go-forward basis, but during this time, our liquidity AUM has grown by $40 billion over the two-year period of 9/06 to 9/08.

Finally, we are particularly confident when you consider that progress underway by the fundamental initiatives taken to improve liquidity and trading, which as we have said all along is the key issue here. The Fed and Treasury actions dedicated to asset-backed commercial paper, agency notes, most recently commercial paper and CDs, put equity in the top nine. Bankers and dealers, most of whom are key traders in this marketplace all bodes well for an opportunity to work through these remaining exposures.

Let me now turn to our growth strategy. Our management team and our Board have worked together over the past 90 days to rigorously review all business opportunities. We have emerged with a sharpened strategy that makes it clear we seek to be a best-in-class global asset manager. We will base that on three core competencies.

First and foremost, as I've always said, the starting engine of our business, investment excellence; secondly, world-class distribution; and third, service management. These core competencies will be used to allocate capital and operating expenses on a go-forward basis.

As part of this process, we've had continued dialogue with our affiliates and, in fact, held an offsite session with all leaders present. At that session, we affirmed the proven strength of Legg Mason's deep, diverse franchise of investment managers and a model that serves our shareholders well.

Just to put some color on that, let me take a look and share with you as of 9/30, the listing of our eight core asset managers in the order of their contribution margin after cost allocations. First is Western with $584 billion in AUM as of 9/30.

Second is Permal at $35 billion. It has done an excellent job in growing their business both from a performance standpoint and from a business and client service standpoint. While post September, the hedge fund area has certainly taken on some added challenges, we have great faith and confident in Permal's continued success.

Third is ClearBridge at %68 billion, our largest equity manager with noted improvement in performance in areas such as depreciation strategy and even our large cap growth strategy.

Fourth is Royce at $28 billion, a clear leader in small micro-cap investing and looking to expand internationally.

Fifth is Legg Mason capital management at $28 billion, led by Bill Miller and Kyle Legg.

Sixth is Private Capital Management at $5 billion, certainly responding to challenges, but we should point out it had an excellent quarter in performance in the third quarter ending 9/30.

Seventh is Brandywine and their related entities at $43 billion. Finally, Batterymarch at $23 billion, our quantitative manager.

As you can see, this is an enviable collection of best-in-class managers whose distinctions are considerable. Even with short-term performance issues in certain areas, it is a highly respected group of managers. I also have to say that Bill Miller and I have kind of enjoyed the press back and forth, and we thought together we should clarify the roles of each of us.

As Bill has pointed out for the benefit of the fund shareholders, Bill is the Chairman and Chief Investment Officer of Legg Mason Capital Management, manages several of our flagship funds and certainly one of our eight core managers. I, Mark Fetting, am the CEO of Legg Mason. We appreciate everybody getting that straight.

I also think as you look at this, that this is a great combination of equity and fixed income assets, so that while Western has 62% of our assets, the contribution margin is much more balanced.

So let me now talk about the management team and our implementation plan against this core strategy and affirmation of our model. I am excited about the completion of our senior executive team with the addition of David Odenath, who brings 30 years of industry experience coming up through Merrill and Prudential and Hyperion. Most recently 10 years at Prudential, Dave ran the mutual and managed account business, and most recently Prudential annuities, where he led this business from a breakeven to over $700 million in pre-tax profit to a strategy of organic growth, acquisitions and cost efficiencies.

Joe Sullivan returns to Legg Mason with a deep experience in the leader in the fixed income capital markets. Joe is a proven manager, a proven leader and brings investment acumen in a way that will help us as Chief Administrative Officer.

Previously, I announced that we recruited Ron Dewhurst to lead our international efforts. Ron brings 35 years of industry experience. First 10 or so in the Australian capital market where he is a native. Then he went to New York and spent 10 years at JP Morgan. More recently before joining us ran the IOOF/Perennial Group, where, in fact, we served as a sub-advisor through Western.

Peter Bain, who has an industry experience of 21 plus years and a lot of that as a partner at Berkshire specializes in strategy, in mergers and acquisition, and C.J. Daley, our CFO has over 20 years and is leading our financial organization.

I have tasked this management team to focus on these three core competencies and deliver progress, which I will communicate to you as it is achieved. On the issue of investment excellence, we will work with our affiliates with an emphasis on performance and closer tracking of progress and accountability.

On the issue of US distribution, we are going to inject the focus on top and bottomline; net flows matter, not just gross sales; continue to expand our multichannel distribution efforts; put a new and innovative emphasis on new products that will move the dial and continue a focus on wholesaler competency.

On the international front, we will continue those themes but also exploit the restructuring that we've already accomplished in both product and sales forces, continue very good momentum in Asia, with particular plans for China and certain other regions.

On the service management side, under Joe Sullivan's leadership, we'll take a look at the cost structure from a top to bottom basis. We believe we can take advantage of significant phase here and as important emerge with best-in-class service management that does somethings directly and oversees others as appropriate.

My final theme this morning is our near term actions. As you can imagine, the industry is responding to an unprecedented loss of assets and therefore revenues. You would expect us to responsibly balance this need for cost control, but also deliver fist rate client service.

Fist and foremost, I hope you're aware that we have a self-correcting mechanism in our model. Over three quarters of our costs are variable costs and in particular because of the revenue share model that we pursue, that is particularly true with those affiliates that are on such agreements which are considerable.

So as you hear Barry and CJ give an update, keep in mind one thing, that in addition, as part of the overall expense reductions that we've delivered this quarter, $70 million is comp and related variable costs on a single quarter basis. So we have a self-correcting mechanism that should bode well for us on a go-forward basis regardless of how difficult the cycle emerges to be.

Secondly, at my initiative, we looked more closely at our corporate expenses. We've identified in total about $600 million of controllable corporate expenses and we'll go after others as appropriate. We have already as a result of this effort identified 50 million in identified cuts to be realized on a run rate basis by the end of the fiscal year, that is, over next two quarters.

That represents just for those of you who are sharpening your pencils as we are, in fact, $49 million over $236 million of costs examined were 21%. I have tasked our team to pursue this 20% cost reduction as we examine further costs in the corporate area going forward.

Finally, if you look within our affiliates, we do rely on them as the best charge of what's the right thing to do relative to their cost and client service trade-off and investment trade-off. Each of the affiliates are responding appropriately, and making sure that they are on the one hand delivering investment excellence, providing good, strong client service and were appropriate because of the revenue reduction trimming expenses as appropriate.

At the same time, we are focused on growing the business and I am pleased to report from the affiliate initiatives important advances, Western continues to win mandates. While they work through other issues, a significant sub-advisory mandate was won in the US and important mandates were won in Asia.

Legg Mason capital management was hired by an institutional manager highly respected pursues sub-advisory business and retain the opportunity trust in the growth trust strategies. Permal has launched this special opportunity fund to focus on distress securities within the hedge funds face and opportunities for their clients. Batterymarch has won impressive mandates in Japan and elsewhere.

So I have shared with you our four key themes in response to the current situation: an update on SIVs, our growth strategy, the management team and our implementation plans and near term action.

I will now turn it to Barry Bilson to go through his review of the more detailed financials.

Barry Bilson

Thanks, Mark. Good morning, everyone. I'm going to hit the high points and I'm going to skip through some of the metrics that that pretty much are self-generating from what you have. All in, we now have probably our third consecutive quarter with a pretty similar profile of the key operating metrics. So I won't dwell on. Certainly, if there's a follow-on, you give me a yell.

But realization rate, just hitting the sort of the key high points despite a little shifting in the mix of the AUM is still sitting around a 37 basis point excluding performance fees, 37 basis points last quarter. The distribution expenses, they're right in line with the general convention that they have encouraged their look to and that is the sum of distribution revenue plus the advisory fee revenue stream on funds. This quarter was at 41.2, last quarter was just a little over42%

Clearly, the number that is softer this quarter than last, which probably surprised no one is the performance fee side, down dramatically year-over-year and sequentially as well. At this point, I am not sure what the market is doing today, but if we can perpetuate the kind of moves of yesterday, you can forecast the substantial uptick in performance fees for the December quarter. If you're a little more conservative, I wouldn't move significantly off of something around a three to five maybe six number, but it is a no-brainer, but it is absolutely based upon the backdrop of the market.

The other thing I should probably clarify just from a historical perspective, this December quarter, historically is the quarter with the greatest variance of measurement period where there are a number of products principally in the fund-to-funds world that only record performance fees in the December quarter. While Permal's performance has held up quite well on a relative basis, it is below water and unless you are forecasting significant move in the market in the December quarter, do not go up spiking the performance fees for that uptick that we've experienced the past couple of years.

Let's move to expenses. I'll give you a little more color on the comp side. When you look at the compensation percentage, which I know you always do, relative to net revenue, it looks terrific this quarter at 46.9% in comparison to 50.7 last quarter despite an 8% falloff in gross revenue and net revenue. I'd like to tell you that that's all terrific management of our expenses, but that's not completely true. You've got that deferred compensation issue which I'll touch on a bit as well.

We've improved a number of times and I know a lot of other asset managers with this fund prefer a compliance that also had a fair amount of move in this quarter. Last quarter effectively was unrealized loss of $4 million. This quarter is $23 million. If where the expense is below the line, but the recovery in compensation dollar-for-dollar is above the line, that's driving off about a 3.3% relative to net revenue, benefit on the comp and benefits percentage.

You normalize that back, you come right back to that 50% level. But just not to take advantage of the decrease in expense but ignore the non-operating expense. All right. The other piece that's driving in and I know we've had company in this regard was investment securities on our books where we see various products, start-ups, various funds, et cetera, of several hundred million dollars. There is mark-to-market in this quarter, again, unrealized losses of $19 million which shaved about $0.08 per share. That, also, is sitting in that other non-operating.

The fine tune on the SIV marks, you may recall in the middle of September, the 8-K we filed indicated a gross charge of about $318 million. The final marks as of the end of September including the currency had just rose that to 325. So the $1.33 per share actually grew to $1.35.

Let me see, the only thing I probably should touch on, that also works to our disadvantage on reducing the negative earnings per share is the effective tax rate. There has been an issue before where you end up with a loss in the quarter. The impact of some of your variables is much greater. The tax rate, effective rate for this quarter is 37.9, last quarter 37.5. In the general guidance we've given is that 37.5% to 38%.

The mix of the underlying pieces including the state allocations have a much greater impact and therefore a less benefit in the loss scenarios. If you are forecasting a loss for next quarter, additional marks, whatever, something around this 35 level is appropriate. If you are presuming and certainly we all would hope that we swing it to the profit side, then, you can take it back up in that 37, 38 range.

Let me just cycle one thing which hearkens back to a comment that Mark made. If you normalized through this quarter, right, looking at the net revenue and then looking at our operating income. If you adjust out the variance of life, i.e., add back into expense, the recovery for our funded deferred compensation plans and some of the incentive comp reduction relative to the SIVs, you come up with an adjusted operating income margin of 27.2 versus 28.2 last quarter. If you normalize other operating expenses, which I'll touch on in a second and that droves an unfavorable variance of about 1.6%.

If you adjusted that in a normalized base, the operating profit margin this quarter despite the revenue falloff was actually modestly better than last quarter, 28.8 versus 28.2. Decrease in revenue increased adjusted operating margin on an apple-to-apples base.

This quarter last year just for backdrop was the second best quarter in the 100 plus years in the firm. It was about a 32.5, 32.75 type margin. So with the major moves in the market, 20% plus kind of change, the variant moved in the 29% to 32% mode.

What's the bottomline? The bottomline is we have a dramatically variable cost structure. We do have fixed cost, Mark has indicated we're focused on. But if we do have a model that provides protection on the downside, the flipside is that you reminded when it does restrict some of the leverage on the upside.

Other expenses, there is a couple one-offs, pre-committed marketing, advertising situations that dropped in the quarter to the tune of a few million dollars; there is the annual option award on directors that fully vest immediately that clipped a couple of million; and some consulting fees as well. All else equal, I would tend to back that number back down to more in line with last quarter.

The other thing I should mention just so we're dealing with the same numbers, do keep in mind and none of us know what this market is going to do, but our ending AUM is 6% lower than our average for the quarter. If you assume a flat December quarter, you need to be considering the fact that our average off of which we are earning fees is down. Hopefully, I'm wrong and we get a big bounce.

The other interesting metric I see, we make the reference on the cash earnings. It is dramatic. If you look at the intangible asset and the deferred tax shield cash flow, this quarter, it grew about $0.35 per share. There was a little extra deferred tax benefit from imputed interest on an installment payment, take you to $0.31 a share. You annualize that through, and at 10 multiple, you have yesterday's stock price. So, the incremental tax, the cash flow on a 10 multiple gives you a market value. The rest of the business is free.

With that in mind, I should probably, so we can get to the Q&A, flip it over to C.J. to talk a little bit about capital and cash position.

C.J. Daley

Yes. What I am going to discuss are not balance sheet issues, but balance sheet strength.

Our balance sheet remained strong. Cash at September 30th is $3.1 billion, having been reduced from $4.1 billion at the June quarter as a result of two things. One, we repaid $425 million of senior notes in July. As we announced at the end of September, we purchased 550 million of securities from our funds.

So, as previously stated, we raised capital early in this calendar year to provide Leg Mason with the financial strength and flexibility to address our SIV. That cash strength remains on our balance sheet today.

As a result of repayment of debt in the quarter, not including the mandatory convertible security which is payable in common stock, our debt levels are reduced from $2.8 billion at June 30th to $2.3 billion at September 30th. The next maturities of that debt are not due until December 2010.

Our stockholders' equity is $6.4 billion in September versus $6.5 billion in June. Two important measures of our financial are ability to generate EBITDA which on a trailing 12 months was over $1.2 million; and our debt-to-EBITDA ratio, which is at 1.9 times at September 30th. That's down from 2.1 times at June 30. Our credit ratings reflect the strength of our balance sheet.

We are solidly-rated investment grade by all three agencies. In our latest report, one of the agencies report cited our rating was based on the strength of our strong distribution and service capabilities, our very well diversified customer and product base, and most importantly, our financial flexibility based on our capital position.

We have very good company in our ratings categories with names of very large multinational corporations sharing the same investment grade ratings as Legg Mason. In the asset management space, we are in the top half of ratings when compared to others.

So, in closing, we remain confident in our capital position, which is one of strength. We remain very confident of our ability to resolve our SIV issues as we seek that with our current capital. Yesterday, our Board of Directors confirmed their confidence in our capital position by announcing a dividend the same as last quarter.

With that, I think we'll open it up to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from William Katz with Buckingham.

William Katz - Buckingham

Hi. Thank you very much. I apologize I did join a couple of minutes late coming off another conference call. Mark, you mentioned some cost reductions and I was scribbling down those as fast as I could. Can you walk me through the $50 million savings in terms of where they might be coming from? And then you gave a ratio of about 21%, I didn't catch that. I apologize.

Mark Fetting

Thanks, Bill. And we're sorry, we know it's a busy season for everybody, and certainly interesting times. What I've said on our cost reductions is first and foremost recognize the self-correcting piece that comes from the revenue share. You are familiar with that model and as a metric, $70 million this quarter being reported was declined based on that. So we took $70 million by the self-correcting thing.

In addition, what we've done, Bill, is we've identified $600 million of corporate expense which ranges from distribution to option technology to shared services ranging from finance, legal, et cetera. And in our kind of first thorough pass, we took a look at $236 million of cost and we reduced 49. We were able to take out 49 that will be on a run rate basis achieved through the fiscal year. So that's about 21%. So what I've done is charged the team, to keep that bogey at 20% across the remainder of the cost and I'm confident we should get there or close to it. So that's the goal.

William Katz with Buckingham

Okay. I understand that what you are saying is by take 600 million times 0.21, that's basically you think you can get in terms of annual cost savings?

Mark Fetting

Yeah. I think to be fair to the team, I've kind of rounded to 20%, but that's the target.

William Katz with Buckingham

Okay. The second question I have is on the SIVs. I was wondering if you could give an update on where you stand in terms of maybe a weighted average markdown relative to that 14% bogey you mentioned before.

Mark Fetting

I'll let CJ or Barry handle that.

Barry Bilson

Yes, Bill, if you looked at the exhibit 99.2 with the mid-September and you can see the marks at the end of the quarter at the end of the month were virtually identical. It's going to drive you through that non-bank sponsored space at a markdown of 37%, 38%, so obviously, $0.62, $0.63 of fair value assessment at that point in time.

William Katz with Buckingham

Okay. Thank you.

Operator

Our next question comes from Prashant Bhatia from Citi

Prashant Bhatia - Citi

Hi. You said you analyzed the SIV exposure at exquisite level. Can you give us a feel after that analysis what you think the intrinsic value is relative to the $4 billion non-bank save position?

Mark Fetting

Prashant, as you know, everyone who is and that's pretty much everybody in the space is working through this. That's the magic question. Our sense is that the intrinsic value that we see is probably in excess or close to, what we've got this market, Barry talked about. We are aware that there are distress prices lower than that. And that's why we thought the best way we can get color to this was kind of what's the worst case given at our cash and what we believe to be ample cash. And our worst case is $0.14.

And based on everything we're seeing, we believe we have all of the optionality we would need to work through this as we've stated all along in an orderly way. The key for us and going to the heart of your question is, when we really do the underlying exquisite analysis, you do see and it's almost Graham-like, a real difference in what kind of good analytics would show his value and what some of these distress prices are showing.

Eventually, with all of the distressed money being raised, that will be exploited. And we're gonna have to hit that in the right trade-off that we think is good for our shareholders at Legg Mason and our fund shareholders.

Prashant Bhatia - Citi

Okay. That's helpful. And then on the $4 billion, do you also have a rough estimate of what you think will actually mature in the next 12 months or what you'll get in term of cash flow if forgetting about what the market price is, what you'll have in terms of cash from maturities?

C.J. Daley

Yes. This is CJ. We have 400 million maturing in the next 30 days. Absent that, we're somewhat at the mercy of the vehicles declaring distribution. So, for instance, we received a $100 million distribution yesterday from one of the vehicles as they distributed their cash, because right now what's happening is the underlying returns are being held in the security and it's either the receiver or the trustees that are determining when those cash distributions are made.

Prashant Bhatia - Citi

I guess you don't control the distribution date. But do you have a rough feel for how much of the $4 billion the non-bank portion will actually convert to cash over the next 12 months based on maturities? And I understand you don't control, if you get that cash or not, but I'm trying to understand how much turns liquid in about 12 months or so?

C.J. Daley

I don't think we can be as granular as you'd like, but one angle on this is that $1.5 billion or so of that $4 billion has been restructured. And at the moment we're kind of can initiate on a monthly basis access to the underlying piece on the slice, and that gives us optionality that we're quite intent on taking advantage of as appropriate. And then, we do see the others being restructured in a similar way and that's probably over the next six-month period of time. I think in this environment it'd be difficult to give you as granular an answer, as you'd like. But I think that one metric is going to help you, kind of look through it.

Prashant Bhatia - Citi

Great, thanks. That's helpful.

Operator

Our next question comes from Daniel Fannon with Jeffries.

Daniel Fannon - Jeffries

Good morning.

Mark Fetting

Good morning.

Daniel Fannon - Jeffries

Maybe I misunderstood, Mark, when you were mentioning. But some of the numbers you threw out for SIV exposure seemed a little bit higher than I was expecting given the 8-K you filed or you had about $3.7 billion as of the end of September?

Mark Fetting

Daniel, we have tried particularly with that one exhibit. And I think the number of people commented, we've been as thorough in their listing as possible. And I'll let Barry kind of hit your specific or C.J., whoever wanted.

C.J. Daley

The 99.2 is the securities we've supported. The numbers that Mark is talking about is our total exposure to structured investment vehicles. We won our books and in the funds. We've got a top section and that bottom section, Dave.

Daniel Fannon - Jeffries

Thank you. And then in terms of the CSAs that have been put in place, are there any expirations that are coming due where you will be looking to extend and have the talks already begun or how does that process work?

Mark Fetting

I think we've laid that out. And as stated, it's essentially between now and the end of March '09. However, we also do have the intent of seeing if they can be kind of pushed back with the various powers involved. We are not counting on that, but we certainly are going to pursue that if it seems advantageous relative to the investment environment.

Daniel Fannon - Jeffries

Okay. And then lastly, in terms of the Western business as a whole, can you give us a sense of: first off, the commentary they're getting back from clients? You mentioned that a lot of your managers are out making outbound calls; some of the commentary that they're seeing from investors. Then also, is there a pipeline for mandates and how they are positioned to benefit over the next 12 months?

Mark Fetting

I think Western is really a sense of the best of times and the worst of times. They clearly have challenges on certain performance issues. And I think that's been well documented. It's a very competitive climate. Everybody can see that they're kind of as expected given their credit emphasis against benchmarks, et cetera, against kind of leading competitors. And that's a reality.

You'll see their kind of the pipeline is down a bit, particularly in the Core and Core Plus. Having said that, what inspires me is the best of times. They are winning meaningful mandates around the world.

I was at a conference with leading institutional managers, consultants and whatnot. And the talk was what Western was retaining in light of the issues that we worked through some of which were quite visible such as the liquidity piece. And I think this is a testimony to what is a teen-based culture, a rigorous investment process and philosophy and willingness to accept because of their philosophy that there are going to be certain times when they are going to be out of favor because of their investment approach. And I think that's being very well received.

We work together quite a lot with key client calls and certainly working very, I think, successfully together. I hope that's helpful. You could come back to me if you want some more --.

Daniel Fannon - Jeffries

No, that is that. Thank you.

Operator

Our next question comes from Robert Lee with KBW.

Robert Lee - KBW

Thanks. Good morning, everyone.

Mark Fetting

Good morning, Rob.

Robert Lee - KBW

A couple of questions. First one I guess is a question for Barry on the intangibles and the deferred tax which you talked about jumping up this quarter. Is that kind of the new run rate or is that kind of a one-time thing, because there was a fairly meaningful jump in the deferred tax benefit?

Mark Fetting

Yes. There was a question about the tangible deferred tax from Robert Lee.

Barry Bilson

You're looking at the cash, the earnings page? Rob.

Robert Lee - KBW

Yes. I think it was $40 million and running around $29 million or so.

Barry Bilson

Yes, I touched on that and probably not well. There is a piece of what's in the $40 million. It's about $6 million. And if you looked at last year versus the preceding quarter, you'd see a very similar. It's an imputed interest on an installment payment related to private capital management.

At the point of payment, there is a tax deduction for code and imputed interest. So, that gave a spike of $6 million. All else equal, next quarter, you ought to see that thing back down a bit. Last quarter, there was a charge back on the gain of the sale for that Private Portfolio Group.

So, the 29 last quarter was a little bit low, and the 40 this quarter is about [6.2]. So, if you're around a 34 kind of number, that should be about where it's cracking next quarter.

Robert Lee - KBW

And I guess a related thing, a couple of quarters back and I don't know exactly which, you did have to write down some of the goodwill, I guess, related to private capital management. And I guess that had some fallout effect obviously on, I think, the deferred tax benefits you recognized.

Given where the private capital management is now, given if I look at ClearBridge, the decline in assets there, when is the next time you do an intangibles test and is there some concern that we could see maybe some more pressure on that kind of tax benefit?

Mark Fetting

We do our intangibles testing every quarter. Through September 30th, we did not have any additional impairment. But we monitor it quarterly. And obviously, we can't make any predictions about December. We'll be testing again at the end of December. But we do test quarterly.

Robert Lee - KBW

Thanks. And I'll get back in queue for my next question. Thanks.

Operator

Our next question comes from Matt Snowling with FBR.

Matt Snowling - FBR

I have a follow-up on your SIV issue. As I read your filings, it looks like unless I'm wrong, you have [CSA] agreements supporting about $2.5 million of SIV. That expires in March. And the language suggests that you may have to purchase securities. Is that correct?

Mark Fetting

Each of the credit support agreements actually has slightly different requirements. But at the end of the day, what you should be looking at is we've made a commitment to support these funds. We would have to kind of buy if we don't have arrangements for a disposition prior to it, at amortized costs. And then our support would be put in place. Our support would be relieved. And then we would do what we think is right. We may take advantage of the markets and kind of our situation, the work we've done in advance at the time or after. We have those options.

Matt Snowling - FBR

You can either sell those securities in the market, buy them right at par or extend the CSA agreements?

Mark Fetting

Yes. And let's say, the fund chose to sell those and we've got support in place, then, we would provide support to the difference between what the funding collects and what we have provided.

Matt Snowling - FBR

Perfect. I wanted to understand that.

Mark Fetting

Thank you.

Operator

Our next question comes from Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Credit Suisse

Good morning. A few questions here. First with related to the US Treasury insurance program for money market funds. I was wondering if you could provide a little detail here. Because I'm wondering if Legg Mason clients are paying the four basis point insurance premium, won't the government be providing Legg Mason insurance benefits for the asset-backed commercial paper loss and its funds?

Mark Fetting

They're not connected at all. So let me having spent a fair amount of time with some other industry leaders working with both the Treasury and Fed on the various programs impacting money fund. The insurance program, which was the first program announced following the reserve fund issue and has proven to be very effective, by the way, is merely what I call death insurance.

We have no intent on taking advantage of it nor I'm sure does anyone, but it gives fund and the fund boards, the comfort that should any fund break a buck during its covered period, which at the moment runs through 12/19/08, and may or may not get extended.

During that period of time, you would have to and the fund boards would have to determine that you have broken the buck. You're given the chance for remediation. If you can't remediate, then you would have to close the fund, hence the death insurance analogy. And once you close the fund, anything that's between a buck a share and what you get on disposition, would come out of that insurance. That's its period. It's not related to anything else that you've mentioned.

Craig Siegenthaler - Credit Suisse

I understand. And a related question on the SIVs. You're marketing them I guess around $0.62, $0.63 to the dollar. I'm wondering if you could give us a sense for where value is in the market now if you were forced or wish to sell those in the secondary market today.

Mark Fetting

It's difficult to say because that number is an average and it's very dependent on the underlying QSIVs. We've got QSIVs that are trading right now at par and we've got ones that are trading below that number. So, I think that the important thing is in my mind the following; that if you track this through the crisis period of August '07 until now, you have been through chapters, Classic Graham chapters of fear, greed, capitulation, et cetera.

And you are now at a stage where you are seeing liquidity coming in, you are seeing more trading, you're seeing blocks trade with bigger numbers and so we're by no means out of the woods yet. There's still less liquidity than there should be. Let me be clear, but there are some improvements. And as a result, as I said earlier, we're confident that we have what it takes to cover our exposures and do it prudently.

Craig Siegenthaler - Credit Suisse

I understand. I don't know if you guys follow the Sigma SIV or I believe you owned it probably about six months ago. But this was a program that actually was trading close to par and then collapsed around the last issuance date. And I'm wondering with a lot of these SIVs are stored in restructuring mode and a lot of more paying interest, how do you get a feel for underlying asset volume beneath them?

Mark Fetting

First and foremost, you are correct that we have no exposure to Sigma in the fund and we have not seen onerous fallout on that. Since we don't have it, I haven't gotten into the underlying collateral, but its all about heavy into all day versus CDOs, et cetera. And that I'll let others deal with.

Craig Siegenthaler - Credit Suisse

Great. Thank you for taking my questions.

Mark Fetting

Thank you.

Operator

Our next question comes from Hojoon Lee with Morgan Stanley.

Hojoon Lee - Morgan Stanley

Good morning. A few questions on Permal. Could you talk about some of the trends you are seeing in fees, products and maybe demand for different products in the hedge fund space as well as more specifically for Permal? And if possible, could you give us an update on flows and performance both on September and year-to-date?

Mark Fetting

Yes. Permal continues to fare extremely well against the peer group of hedge fund managers. And through 9/30, it continued to show very strong performance and while reduced flows for the quarter positive flows.

However, as you've been reading about October is definitely is kind of a challenging period for the hedge funds themselves and the hedge fund managers. And I think you'll continue to see Permal on a relative basis perform well. But we're into some choppier period, if you will.

At the same time, Permal is a very focused on building out its product and taking advantage of investment opportunities that it sees. So, in meeting with them last week, they had several exciting product opportunities that they're talking to the clients about and the one specifically that they have launched is the opportunity fund.

Hojoon Lee - Morgan Stanley

Okay. And if possible, could you quantify how much of Permal's AUM is currently below high watermarks?

C.J. Daley

I really wouldn't have that number. Barry, can --?

Barry Bilson

It's an approximation. But relative to end of quarter or today with October not being a good period, most, not outrageous, but material. So, the short answer is, absent a marked uptick in the market, there will be minimal performance fees that they'd be driving in the December quarter.

Hojoon Lee - Morgan Stanley

Thanks, Barry. And one follow-up question on WAMCO. I wanted to get a better sense of where you saw the outflows in fixed income maybe in terms of products and between retail versus institutional?

Mark Fetting

I think because they have a concentration of assets in the Core and Core Plus area. And as you can, if you track their mutual fund, the Western Core and Western Core Plus, at least on a short-term basis, they've got some underperformance.

So in that area, in the global side coming out of the U.K. and the London desk, there has been some outflows. They continue to fare well in the high yield emerging markets. In Japan, they have mandates tied to global sovereign funds, and they continue to grow nicely.

So as I say, this combination of good and, let's say, challenging, and I know I'm going to get beat up for my best of times, worst of times, so I'll say it a little more softly.

Hojoon Lee - Morgan Stanley

Good. Thanks. And based on your conversations with institutional clients, given the broad and sharp sell-offs and risky assets we've seen, what are your expectations in terms of where you think they're going to be rebalancing or allocating next year?

Mark Fetting

Well, I came back, I guess, a couple of weeks ago from meeting with our largest institutional clients in Tokyo, Hong Kong and Singapore. As you may know, they are among the most astute global investors there are. And I was impressed with near term, this is not the time to be changing strategies and setting kind of new courses. It's a time to kind of stay close, see where things are going. But there is definitely, post that, a sense of a recognition that it it's going to be a new world.

I think in the meantime, as you're probably aware, there has been quite a lot of capital raise for distressed investing. We, such as others, see it still more on the sidelines than being deployed, but it is starting to be deployed. And I think large institutional investors are meaningful participants in that.

I would say, as we set our strategy for the firm, we see the continued strong global demand for traditional equity and fixed income investing. We see a continued extension into the alternative space, and we'll kind of keep an eye on that. And my experience, and I guess is it's over 30 years, particularly the time when I was a partner at Greenwich Associates is, this is a time of great opportunity.

So, I'm sitting here reading Buffett's biography. I am three-quarters of the way through. And actually before he wrote the op-ed about now is the time to buy US stocks, if you read that chronology of his investment success, it is that this is the time.

And so, I think in particular, this notion of traditional long-only US equity investing may well prove to be a valuable area for both clients and therefore firms such as Legg Mason.

Hojoon Lee - Morgan Stanley

Great. Thank you very much.

Operator

Our next question comes from Marc Irizarry with Goldman Sachs.

Marc Irizarry - Goldman Sachs

Great, thanks. Mark, is there anything that you can do specifically to accelerate the exposure of SIVs, sort of moving away from that? And would you be better served doing that in the private context?

Mark Fetting

Well, when you say the private context, clarify for me to make sure I don't go in the wrong direction here.

Marc Irizarry - Goldman Sachs

Obviously, you are fighting SIV exposure. And it appears that you at least tossed there your financial flexibilities, all of it tied to the fate of how quickly you can move away from SIVs. Yes, this is probably a good time for acquisitions in the space. So, is your financial flexibility a little more limited as being public versus if you are private?

Mark Fetting

There are clearly two questions there. Relative to the SIVs, I hope we certainly tried based on the work we've done certainly over the last 30 to 60 days. We feel given the reality of the severity of the markets, given the reality of what is a much reduced exposure but still a kind of remaining exposure, we feel confident of our ability to kind of further eliminate and ultimately extinguish this exposure on with a good outcome.

We certainly have the cash and capital to work through it. Only time will tell how quickly and how one goes through that. I do see some of these fundamentals. None of which are necessarily direct to the issue, but all of which indirectly helped liquidity issue which is the key as a positive.

If you think about what's going on in the private markets in the absence of credit that we are in good stead to be operating as a public company and as I've always said, there is no such thing as a free lunch. You get what you are paid for. So in being a company, yes, we're more visible. Some of our underperformance gets more scrutinized.

But on the other hand, we have access to the markets which we took advantage of in the public in May and we have a currency that as you could probably see we're rather bullish about. And I think it will be a good opportunity. And I will say, as you can imagine, there's quite a lot of interest in including equity as part of our compensation arrangement to these current levels are pretty attractive to a lot of good investors and we have a lot of those in our shop.

Marc Irizarry - Goldman Sachs

And what's your thinking on either dispositions or acquisitions at this point?

Mark Fetting

I think we will continue and then probably notch it up a bit in terms of -- we've always for things that are not core made some small dispositions. And most recently in Chile, the PPG implementation and overlay piece that we sold back to Smith Barney. We’ve got an attractive alternative. We'd probably pursue it. There is nothing on the horizon right now there.

In the acquisition front here again, there are clearly quite a lot of properties out there. And I'm in the active flow and it's good that we continue to be a desired party. But we will focus on our best-in-class opportunities that give us that are compatible with the strategy that we've laid out, and that could deliver dependable returns to our shareholders. And that's what we're doing there.

Marc Irizarry - Goldman Sachs

Okay. And then on Western, obviously three to five year numbers have come in a good bit. You're winning something business. But have you been put on watch by some pension funds or consultant step at this point in time. Meaning that is there are some outflows still on the comp given recent performance?

Mark Fetting

Take a look at our numbers. June quarter we had $10.9 billion in outflow and fixed income. The September quarter was $11.9 billion. I think, until you see our numbers turn, which by the way was very visible in April and May. So the period that the market started to turn in the fixed income side and spreads started to come in, Western did, as it should outperform. And that you could see an immediate impact in terms of the pressure lessening. You'll have to see, that in kind of improvement before you see a meaningful shift in probably the ongoing outflow situation.

Operator

Our next question comes from Douglas Sipkin with Wachovia.

Douglas Sipkin - Wachovia

Thank you and good morning. The bulk of my questions have been answered. I really wanted to make sure I picked up something because I've been in and off in and on the call. You'd mentioned that, you are carrying I guess sort of the weighted average for the SIVs maybe $0.69, $0.70 on the $1. Did I pick that up correctly?

Mark Fetting

Well, I think Barry should repeat because you need to understand the methodology because it's basically based on the public disclosure that we have. Go ahead, Barry.

Barry Bilson

Yeah, there real quick, Doug, and certainly can pursue some of this offline since it's already out there public. But bottoms up analysis, tearing through the portfolios looking at [REITs] et cetera, in the non-bank sponsored space you're looking at a carry fair value 62, 63ish?

Douglas Sipkin - Wachovia

Okay, great. And then you had mentioned that your cash position is strong enough to absorb marks down to 12, 13? Did I pick that up correctly?

Mark Fetting

I think I said, the cuzy number, 14.

Douglas Sipkin - Wachovia

14, okay. Perfect. So I guess you know, you guys can withstand an unlikely scenario of another I guess, 48 points down?

Barry Bilson

Right.

Mark Fetting

That's one way of looking at it.

Douglas Sipkin - Wachovia

Okay.

Mark Fetting

That's why we're trying to get as analytical as we can.

Douglas Sipkin - Wachovia

Okay. Perfect. Now, that's very helpful data point. I am curious, when sort of the fixed income markets blew up I guess around the time of WorldCom and Enron and maybe in long-term capital, you guys obviously underperformed dramatically.

Was the underperformance long enough where it had a meaningful impact on the numbers, one, two, three or et cetera? Or I guess is this time maybe a little bit different where sort of some of the longer-term numbers have borne the brunt of prolonged weakness in the credit markets?

And if so, will that have a little bit of an impact if investors want to reengage and start taking corporate risk again? I've seen a lot of pundits say that the bond market, some areas are more attractive than any time and unbelievable amount of time. Do you think the weakness in the numbers might prevent money coming back to you faster than it otherwise would?

Mark Fetting

As always, you are directing it towards the Western. And the advantage is that they are largely an institutional manager, and they are more poised to take advantage of kind of secular shifts, so that when we come out of this, as has happened before, and you are correct they've been much shorter.

Western didn't really in total lose any ground in terms of its basic business momentum around growth and whatnot. This time, it is a more extended period. And we are, as a set of financial markets in the US, going through what is the most difficult period we've been through in our careers.

I think Western will come back. It will therefore be rewarded by both the combination of investors who are staying with them, based on that long-term record, and also those who see an advantage as you move into a different cycle.

Douglas Sipkin - Wachovia

Okay, great. And then looking at some sort of historical numbers, it looks like now, I guess, after the month of October, we are likely to surpass sort of this capitulation period in mutual fund outflows versus maybe early 2000 and two-time horizon when investors fled out of the markets. I am curious, conversations you might be having with retail investors, do you guys get the view that we are close to the point where the mutual fund outflows are going to slowdown based on the sheer mass that we've seen over the last three months?

Mark Fetting

Specifically calling that is a leap to others, but I can give you my own personal bellwether. And that is my brother John is a 30-year doctor at Johns Hopkins Hospital. And at every market dislocation before, he pretty much hits the bottom when he calls me saying that over the weekend he looked at what happened to his retirement savings and he has to make a massive change.

And John and I had such a call over the last two weeks. And whether that turns out to be the actual bottom or near the bottom is proven to be a pretty good indicator.

Douglas Sipkin - Wachovia

I guess that's an anecdote. But I guess you are not seeing actual physical data. You haven't looked at, I guess, physical data, comparing it to sort of that capitulation period, and maybe it took three to four months, maybe even five months to play out. I guess it looks tough.

Mark Fetting

I think when you get the capitulation, it will only be in retrospect when you see kind of it having happened.

Douglas Sipkin - Wachovia

Right.

Mark Fetting

But up until that point, it is a function of anecdotes. So, whether it's Buffett writing an op-ed piece or Dr. John Fetting standing firm when [other ones] start up to go otherwise, et cetera. But I think we are working through it. That's the key.

Douglas Sipkin - Wachovia

Okay, great. And then can you maybe provide a little bit of color on the revenue share arrangement with Western? I know over time as you guys have recognized SIV losses, it looks like you guys have taken on a bigger burden of that. Any update on that as to when maybe that might reverse over time or is that really a judgment call or how should we be thinking now about that?

Mark Fetting

I think as Barry referenced our over 100-year history that when this particular chapter, and it's a torturous one, is summarized, the partnership that we have with Western will go down as one of the best things that we've done as a company.

And so, Jim Hirschman, Steve Walsh and Ken Leech, who has returned from his medical leave in a different but important flow, and I have an agreement that we will provide support such that over time, they will provide an appropriate payback on kind of what we've done, but only in a way that can be done so that we continue to attract, retain and develop top quality talent. And so, I feel good about that, and I believe they do as well.

Operator

Our final question comes from Jeff Hopson with Stifel.

Jeff Hopson - Stifel

Okay, great. Thank you. Mark, can you maybe step back a little bit in viewing the dramatic changes that have occurred here in terms of destruction of wealth and possible changes with distribution in the US, maybe talk about how dramatic you think changes could be in this industry and maybe give us an updated long-term view on the asset management industry from Legg Mason's perspective?

Mark Fetting

That's a great question. I think a lot of this is fueled by a convergence of excess around subprime. And I kind of recommend this book, Chain of Blame, which some journalist did following the industry. And when you go through that over a decade, you realize that everyone kind of jumped into the food chain and pursued excess that it's going to take a long period of time for us to fully recover from.

And my hope is that we actually avoid, what typically happen is as soon as you get out of the hole, you can go back to your old practices in a different form. And maybe that's a good way, if I can, Barry, to kind of start to conclude because this leads into….

Barry Bilson

Thank you for that question. But what I'd like to do is acknowledge first and foremost my colleagues at Legg Mason throughout the world and extend my appreciation for their support of their client, their support of each other and their commitment, even at a time when we're doing things such as cost cutting and making difficult decisions on a go-forward basis in terms of our strategy that we remain one firm committed to deliver for our clients. That has always been our hallmark and it always will be.

We do that with an emphasis on investment excellence, world-class distribution and a sharpened sense around service management. I'd also like to end for all of us to think about take care or kind of home Jersey off, whether it's Legg Mason or analysts at Goldman Sachs or Morgan Stanley or Wachovia or whatever.

And I'd like to share a personal observation that our financial leaders and the leaders around the world are coming together in a way that maybe it wasn't as apparent and as impactful earlier but it is now. I have seen this upfront and personal in issues around mutual fund industry, discussions with the Fed, with the Treasury, with the administration, with the SEC.

And what is clear now, is that we are determined not in the US, but I saw this when I was visiting Asia. Other countries that we are going to do what it takes to list ourselves out of this and also helpful is the sense that the world wants the US to win. The world wants us to lead because they recognize we have to and I believe we will.

So it's always difficult to do this, but it's succinctly said when Hemingway talked about guts as grace under pressure. If we continue to have that and a commitment to work together, certainly, we at Legg Mason on behalf of our clients and shareholders are confident that we're going to work through this and deliver value.

So with that, I thank everybody very much and we'll keep you posted as we go along.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the teleconference. You may now disconnect. Good day.

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