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Haldeman's $54 Billion-Dollar Question

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.