The harsh reality for Putnam Investments is that the firm has bled assets at an alarming rate, had sub-par portfolio performance the last few years, and upset the trust of investors and business partners due to developments of unchecked market timing activity at the firm.

Enter Charles "Ed" Haldeman Jr., the man who took the reins from Larry Lasser, after the iconic leader was asked to leave the firm in November for failing to act forcefully with the wrongdoers.

Haldeman, now the CEO, is charged with cleaning up several years' worth of mess, after joining the firm from Delaware Investments in late 2002 (see MFMN 5/14/01). He is being asked to turn the performance tide, while retaining key investment personnel, restoring faith in the firm and dealing with ongoing investigations.

We sat down with Haldeman in his office at Putnam's Boston headquarters to discuss the firm's regulatory and financial woes, the steps he has taken to rebuild the business and his outlook for the firm's future. What follows is Part I of the in-depth, frank discussion.

MME: Does Putnam have a problem with its corporate culture now, and did it have one leading up to Larry Lasser's departure?

Haldeman: I think a large part of American society, most financial services firms and Putnam, all had some problems that came out of the unusual economic and market environment of the late 1990's. It now is clear that impacted the country and financial services firms, including Putnam, very negatively. It created an environment of short-term thinking - to get as much as you can.

So, a lot of bad behavior went on in lots of places, and Putnam wasn't immune to it. I think in that period of time, Putnam got a little confused about what business it was in. Putnam forgot that it is in the business of taking care of other people's money. Too much focus was put on assets under management, growing the business, profitability, how to get more assets in the door, and probably a little less focused on what's best for the client. I think in that environment, we had some portfolio managers who put their own interests ahead of the shareholders and did market timing in some of their mutual funds.

What we're trying to do is make sure that every person at Putnam comes to work every day and defines their job as taking care of other people's money.

MME: So, you are saying there is not a problem now?

Haldeman: We have worked hard to fix it, hard to change it. We've learned the hard way the negative impact, negative fallout, of getting off track, doing some of the wrong things. We asked some people to leave Putnam - six portfolio managers and nine other employees - based on having gone through the trading records of every past and present employee. I think the message has been delivered loud and clear: Putnam won't tolerate anybody who puts their interests ahead of the shareholders'. There is zero tolerance to that.

MME: Putnam has already agreed to a fiercely criticized settlement with the SEC. Do you anticipate charges being brought by Massachusetts, New York or any other state or regulatory agency?

Haldeman: We are in discussions with the State of Massachusetts. They have alleged wrongdoing. The State of New York has not as yet. But we hope and expect that we can enter into a resolution with the Secretary of the State of Massachusetts.

MME: New York A.G. Eliot Spitzer called the SEC's agreement with Putnam "a joke," and Massachusetts Secretary of the Commonwealth William Galvin said he was "outraged" by it. Do these comments indicate they are gunning for Putnam?

Haldeman: I think in the case of Mr. Spitzer, he has a very clear notion of what he thinks is necessary to improve the industry and it has to do with fees. He is disappointed that the SEC agreement that we entered into didn't speak to the issue of fees.

Mr. Donaldson, the head of the SEC, in an op-ed article in The New York Times and The Wall Street Journal, said it didn't include fees because a settlement is in response to a particular wrongdoing. The wrongdoing in Putnam's case had to do with improper market timing, and the settlement was an attempt to fix that.

Donaldson went on to say that if there are other problems with the industry - fees or disclosure, or whatever - those issues may be taken care of in the future.

Secretary of State Galvin was troubled, it seems to me, mostly by the notion that there wasn't a clear enough statement of wrongdoing. We've tried to say as clearly as we can that there was inappropriate market timing activity at Putnam, and we were embarrassed by that.

We apologized for it and we've tried to rectify it both by getting rid of the people involved and by promising restitution. What seemed to trouble him was specific language in the agreement with the SEC that says "Putnam neither admits nor denies" - language that is quite typical in these kinds of settlements. We're working hard with Mr. Galvin to try and find a way that he feels O.K. about what we're trying to do at Putnam.

MME: Putnam took a $24 million charge for restitution and other costs in the fourth quarter. How was Putnam able to negotiate such a favorable deal without even admitting guilt?

Haldeman: First of all, that number included a reserve for restitution, not actual restitution. Based on the best knowledge we had in the fourth quarter of how much it could be - and it was largely unknowable - we took a reserve.

The SEC has not told us what the restitution, nor the penalty, would be. It is reasonable to ask the question, "How it could be many hundreds of millions of dollars at MFS and Alliance, while Putnam might be charged with an amount much smaller?"

We don't know for sure yet, but we think it will be much smaller, and the reason is the following: It has to do with the economic harm done to the Putnam shareholders versus the economic harm done at MFS or Alliance. Admittedly, the economic harm done at Putnam is not zero, and our portfolio managers did some inappropriate things and they put their interests ahead of shareholders', but it is pretty small in a relative sense.

The papers seem to indicate that an executive at MFS said, "We now have $1.3 billion of market timers, that's enough." I don't know if that's true or not, but it's $1.3 billion at work in those funds harming investors, versus our portfolio managers, who weren't poor people, but the amount they might have is a couple of million dollars.

MME: Is there any chance of a sale of Putnam?

Haldeman: I think not. Jeff Greenberg (MMC chairman) has been very clear to Putnam employees, MMC shareholders, and the outside world that Marsh & McLennan likes the investment management business and has no intention of selling Putnam.

MME: Putnam's managed assets dropped $32 billion in the fourth quarter and net outflows totaled $53.7 billion, nearly 20 times third-quarter amounts. Putnam also announced it will reduce the fees it collects. The combined facts do not paint the picture of a healthy company. What is Putnam's financial outlook?

Haldeman: My concerns since I've been in this job have been solely focused on restoring investor confidence, putting the regulatory and legal issues behind us, and proving to our clients and the outside world that Putnam is a good place for their money to be. And doing all we can to deliver good performance on the $240 billion in assets that are still here.

I've spent essentially no time thinking about the economics of the business. My hope and expectation is that by restoring investor confidence and by delivering good performance, eventually clients will bring their assets back to us and we will again return to becoming a growing business and get our profitability back again. But that has not been a short-term focus of mine at all - zero time spent on that.

MME: Putnam is the worst-selling family of stock and bond funds two years in a row. Add in Putnam's recent problems and regulatory scrutiny on soft dollars and "pay-to-play" practices, it would appear that Putnam is going to have to change the way it appeals to broker/dealers. Is this the case?

Haldeman: You're right that we have had two negative years in a row in terms of sales. The first year was because of the very poor investment performance in 2000 and 2001. In 2003, we began to see some stability in terms of fund flows, and then we were hit by the market-timing news, which made the fourth quarter very negative.

The way we're going to appeal to the marketplace on a going-forward basis is to give them a better value proposition than we have in the past several years.

By that I mean we are seeking to have investment performance be superior by being consistent - that is, above-average year after year and have our fees be below average. We think that if we deliver that value proposition for long enough, people will recognize it and be attracted back to the Putnam brand.

MME: In a 2001 interview with this publication, you said your mandate at Delaware was to turn around performance, and you spoke about how poor performance can lead to a dangerous cycle of outflows and personnel departures. What parallels can you draw between then and now?

Haldeman: What I said then is true for investment organizations and is a potential concern here. Poor performance in the funds, like in 2000 and 2001, then leads to outflows like we had in 02, which then discourages people and good investment people leave.

We are trying as hard as we can to break that downward spiral by getting our investment people to stay with us. We are working hard to explain to them what our strategy is at Putnam, how we seek to make this a better place for them to work, to make them believe that Putnam is going to turn around and get to be a great firm again.

One of the things I'm trying to do right now, is on a one-on-one basis, visit with essentially everybody in the investment management division to get them excited about Putnam.

MME: Your company just announced it will lower fees. Where is Putnam going to make up for the lower margins?

Haldeman: What we're counting on is that by offering a better value proposition to the customer, that we will attract clients back, grow the business, and the profitability will come back due to higher assets under management, higher revenues. But, in the short term, there is a possibility of lower earnings.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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