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Jefferies Details Its Exposure to Shaky European Debt

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.

Article source: http://feeds.nytimes.com/click.phdo?i=be38f8dc8e2710d74a2153842195dd0a

Italy Moves to Rein In Short-Selling Amid Market Jitters

The step came as European Union officials met in Brussels to wrestle with threats to the currency union, even as wider discussions stalled over a second bailout for Greece.

Amid the continued uncertainty, the euro declined more than 1 percent against the dollar, to $1.4058, and the Euro Stoxx 50 index of euro zone blue chips was down around 2.4 percent in afternoon trading. Trading in Standard Poor’s 500 index futures suggested Wall Street stocks would decline at the opening bell.

Germany sought to soothe the latest jitters ahead of the talks in Brussels.

Angela Merkel, the German chancellor, said she spoke Sunday with Prime Minister Silvio Berlusconi about the Italian situation, The Associated Press reported from Berlin. Italy needs to send a “very important signal” by approving an austerity budget, Mrs. Merkel said, and she has “firm confidence” that the Italian government will do so. Mrs. Merkel also called on the European ministers to sort out the Greek aid “in very, very short order,” the AP reported.

Consob, the Italian market watchdog, took its step on short-selling after Milan banking shares fell heavily last week. Investors were unnerved in part by signs of a growing divide between Mr. Berlusconi and the finance minister, Giulio Tremonti, who has been praised for his handling of the economy during the financial crisis and for maintaining control of the budget deficit.

In a statement, Consob said the measures were similar to those already in force in Germany. Under the new rules, short sellers must show their hands when they have a net short position of 0.2 percent holding of a company’s capital. They also must notify the market each time they obtain 0.1 percent more.

In a short sale, an investor sells a borrowed security in the hope of repurchasing it later at a lower price, pocketing the difference as profit.

The FTSE Italia All-Share index has fallen about 7 percent this year. It was down more than 3 percent in afternoon trading.

The trading curbs were enacted as top European Union officials met in Brussels ahead of an afternoon meeting of finance ministers from the euro area, which is expected to focus on how to resolve Greece’s troubles.

A spokesman for Herman Van Rompuy, president of the European Council, denied that the morning meeting would cover the state of Italy’s finances, which many investors consider increasingly precarious. But another official, who requested anonymity because he was not authorized to speak publicly, said Italy would probably be on the agenda.

For Italy, the cost of debt financing rose last week, though it is still well below the levels faced by Greece. The spread between the yield on the Italian 10-year bond and the German equivalent widened on Friday to 2.36 percentage points, the most since the introduction of the euro.

Italy’s cost of borrowing for 10 years is now about 5.27 percent.

The euro zone has been shaken by the fiscal troubles of Greece, Portugal and Ireland, though their economies are relatively small. The Italian economy is more than twice the size of the combined economies of those three countries. If investors were to drive Italy’s borrowing costs to unsustainable levels, it could imperil the entire European monetary union.

Even without Italy, European officials have a big task in the coming days. They have reached an impasse of sorts on whether to include the private sector in a second Greek bailout, which is considered essential to controlling the crisis that has so far been limited to the smaller economies on the Continent.

Some officials now believe that any bailout plan involving a substantial but voluntary contribution from private investors in Greek debt would be declared a selective default by the bond rating agencies Moody’s, Standard Poor’s and Fitch. The officials’ objectives of achieving a private sector contribution that is voluntary and substantial — but which is not judged a selective default — may not be possible.

If voluntary steps would cause such an event, these officials say, then more radical options may as well be considered, including requiring banks and other private investors to take part.

Article source: http://feeds.nytimes.com/click.phdo?i=dd06b49b7471bf4b2e73638b8ee1eeee

Jefferies Details Its Exposure to Shaky European Debt

Italy Moves to Rein In Short-Selling Amid Market Jitters

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