Investors have pounded Jefferies’ shares this week on fears that it could face the same problems as MF Global, which collapsed on Monday in part because of a big bet made on European debt. In the case of Jefferies, executives say it is effectively hedged for whatever the market does.
“These are fragile times in the financial market and we decided the only way to conclusively dispel rumors, misinformation and misplaced concerns is with unprecedented transparency about internal information that is rarely, if ever, publicly disclosed,” said Richard B. Handler, chief executive of Jefferies.
The firm said that despite more than $2.4 billion in gross exposure, its total net exposure equaled just $9 million, because of trades where it has made a bet against euro zone bonds, called a short position. The short position offsets the risk of holding the bonds, known as a long position. In the case of Italy, for example, Jefferies said it owned $2.09 billion in Italian bonds, while it had an offsetting short position of $2.01 billion.
After swinging Friday between a low of $11.12 and a high of $12.97, shares of Jefferies finished the day at $12.07, up 6 cents. That’s still down 18 percent for the week.
Despite the additional disclosure, analysts said part of the problem was that even if Jefferies’ exposure was manageable, its business model depended heavily on short-term borrowing, exposing it to trouble if lenders became nervous and pulled back on credit.
Jefferies is hardly the only brokerage firm that relies heavily on short-term borrowing, and analysts say these firms are likely to face more pressure. The short-term funding model prevailed on Wall Street until the financial crisis of 2008, when doubts prompted lenders to cut off credit as Bear Stearns and then Lehman Brothers tottered, helping to push some firms toward the brink. In response, survivors like Morgan Stanley and Goldman Sachs assumed the status of banks, which gives them access to ample money from the Federal Reserve’s discount window if private sources of cash dry up.
While Jefferies’ leverage isn’t extreme by Wall Street standards — it stands at about 13 to 1, compared with 34 to 1 for MF Global — Jefferies must still borrow $13 for every dollar the firm has in equity. The doubts about the firm expressed in the sell-off of its shares this week can prompt more nervousness among lenders and even more selling.
As a result, executives have been fighting a fierce battle to stave off talk that Jefferies is in trouble, reaching out to analysts, investors and traders in a bid to reassure them, and issuing five press releases over the course of the week.
“Our firm stands on a solid foundation of over $8.5 billion of long-term capital and we look forward to continued success,” Mr. Handler said in a statement on Friday.
The additional information released Friday “misses the point,” said Sean Egan of the Egan-Jones Ratings Company, which tracks credit risk and which downgraded Jefferies earlier in the week.
Risk officers at financial firms will be much more cautious in the wake of MF Global’s demise, hurting independent brokerage firms like Jefferies that do not have the backstop of the Federal Reserve’s discount window. At the same time, the dependence on short-term financing heightens risk when volatility increases and market conditions deteriorate.
“Previously well-founded assumptions are being challenged in this market,” Mr. Egan said.
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