Issue link: http://www.e-digitaleditions.com/i/58912
The recent $3.7 billion "Citi swap" has sparked a lot of attention in the press, not only because of its size and rarity, but also because it allowed both Citigroup and Legg Mason to focus on a single business. Why did you think this was a good move? It was a difficult decision for me. I wasn't quite sure it was the right thing for the company because of the intensity of it, the size of it, the scope of it. It caused us, essentially, to leave behind the brokerage business. Even though the brokerage was only 25 percent of our busi- ness, it still was a longstanding, large part of our business. But I think it was the right decision for the stockholders. Because it allowed you to avoid even the appearance of conflicts of interest? Much has been written about whether brokerages can sell their products directly without conflicts of interest. Frankly, I really don't think it's that big a deal, but it really doesn't matter what I think. What matters is what shareholders think. The shareholders believe that this arrangement is in their long-term interest, and I do, too. The Legg Mason/Citi deal will certainly be studied in business school classrooms. What are the most important things that students should learn from it? Well, I think they ought to wait a year before they study the deal, unless they want to do it without any answers. With deals like this, analysts have expectations that are, at least in my opinion, too aggressive. This is an enormous change- over, just from a systems standpoint, and we have to be very careful in terms of what we do, how we do it, and when we do it. This is not a business where we have room for error. It's not enough that we're proven right in a few years; we have to be right one second from now. In a year, it will be much easier for a business school and its students to begin to understand the complexities of this in a case study. They'll know more about what went on and how it turns out. What did it take for you and your managers to make this transaction successful? For something like this, we needed people who've been in the business 20 years. It's critically important to have people with the ability to make judgments, sometimes almost on the fly. Without people who are experienced in the business 18 BizEd SEPTEMBER/OCTOBER 2006 and who know what the pressure points are, something like this would be incredibly difficult. Since the mutual fund scandals, how have you adapted Legg Mason to a climate of increasing transparency? We try to make sure everything we do is done in a way that's transparent; but, really, the finance industry is probably the most transparent business that exists. There's no other prod- uct you can buy and know the company's profit or markup. You can't buy cars that way, you can't buy food that way. But in this business, you know what you're being charged to the penny. The thing is, much has been made of the mutual fund scandals; but, in fact, much of what happened in those scandals was not illegal. Fund managers may have been promoting their own interests, but many of them had not broken any laws. Some even stated what they'd done in their prospectuses. Their only mistake was poor judgment. In most business endeavors, you know when the rules are going to change, and then you can adapt to the new rules. But in this business, the rules are always changing. Finance firms are moving billions of dollars every day; they're moving them in large chunks, across continents. Coping with changing regulations is tough, so we must constantly decide what our disclosure rules must be. We've got to hire a lot of people from the SEC to go into our legal department. We've got to hire the best law firms to comb through areas where there are potential conflicts of interest. We've got to find areas where we could run into trouble without even realizing it.