A report today in the New York Post indicates that Western Asset Management Co., a unit of Legg Mason (NYSE: LM), is one of several institutional investors hatching a plan to absorb bad assets from banks. The Post says that LM's unit is "among a growing group of big-name investors looking at establishing vehicles similar to real-estate investment trusts that would sell shares to the public and use the proceeds to buy troubled residential mortgages and commercial real estate."
Other interested parties include Pacific Investment Management Co., as well as billionaire Gerald J. Ford, says the Post. The creation of an REIT-like entity to purchase undervalued mortgage assets would fall under the Public-Private Investment Program described by Treasury Secretary Timothy Geithner earlier this year as part of the government's broader bailout initiative.
Traders seem unenthusiastic about LM's willingness to buy up toxic debt, with the stock down nearly 3% in the first hour of today's session. The security is currently pulling back from resistance in the $25 region, which has capped LM's progress on the charts since October 2008.
Despite the stock's struggles, option players have lately shown a bias toward bullish bets. During the past 10 days, traders on the International Securities Exchange (ISE) have bought to open nearly 10 times more calls than puts on LM. This hefty call/put volume ratio ranks within two percentage points of a 52-week high, revealing that calls on LM have rarely been in greater demand.
However, some of this call buying could be hedging activity by short sellers. Short interest on the stock jumped by 8.9% during the most recent reporting period, and now accounts for 12.7% of LM's available float.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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