Legg Mason's big Citi deal keeps the hurt on

Mark Fetting has been president and CEO of Baltimore-based money manager Legg Mason (Symbol: LM) for less than six weeks but what exciting weeks they’ve been! Today, the firm announced yet another write-down to cover for structured investments gone bad in its cash funds. S&P downgraded the shares to “hold” from “buy,” noting that “continuing struggles, combined with tough markets and recent fund underperformance, will continue to adversely affect fund flows and average asset balances.” The company’s shares are off just 2% but they’ve dropped 15% in 2008.

It’s got to be hard any time you succeed the founder of a company in the big chair, especially when that founder was as successful as Fetting’s predecessor, Raymond “Chip” Mason, was for most of his tenure. In 38 years at the helm, Mason built the firm from a small regional brokerage into a money management powerhouse with almost $1 trillion in assets.

Most of Mason’s moves were spot on, buying Western Asset Management, the bond titan, for a song back in the mid-1980s, for example. But Mason’s last move — his biggest by far — hasn’t turned out nearly as well. Swapping his brokerage force to Citibank (C) in return for Citi’s fund division may have seemed like the perfect way to cement his legacy. But Mason and his team struggled to keep investors, many of whom were pushed into the funds by Citi’s various brokerage squads. Now it’s an open market and investors are checking out. Ironically, it’s probably some former Legg Mason brokers, now at Citi, suggesting their clients dump their former Citi funds, now run by Legg.

Adding to Fetting’s woes are problems at the nearly $150 billion of cash funds Legg Mason got from Citi (some are actual money market mutual funds, others are less-regulated imitations). Seems Citi had stuffed many of the funds full of asset-backed securities issued by structured investment vehicles, or SIVs, which in turn were backed by subprime mortgages. Oops. Fully 6% of Legg’s cash business was invested in SIVs last October and that was after the firm had already been selling the stuff as fast as possible. As of the end of February, the SIV exposure was down to 2.2% in cash funds totaling $174 billion.

Fetting & Company will no doubt be working the phones for the next six weeks, trying to complete a turn around that’s grown more difficult and complex in the past six months. Then he can get on with turning around stock fund performance. Legg Mason star manager Bill Miller’s had two bad years in a row and he’s down 19% already this year. It’s quite an initiation for a new CEO,. At least he’ll be battle tested for the next market meltdown.

Before it's here, it's on the Bloomberg Terminal.