Should Jefferies' employees in London be taking defensive action?
Bad things have been happening to Jefferies this afternoon. The bank's stock fell up to 20% after it was downgraded by ratings agency Egan Jones from BBB to BBB-. This is significant because Egan Jones was one of the only ratings agencies to predict the demise of MF Global and is therefore considered ahead of the game.
Most notably, Egan Jones highlighted the fact that Jefferies' sovereign debt exposures appear to total 77% of its equity. Jefferies has countered this with a statement claiming that its sovereign debt exposures are fully hedged and that its combined net short exposure is equivalent to only 1% of its shareholders' equity.
The question becomes, therefore, whether those shorts would work in a systemic crisis. As Sean Egan has allegedly pointed out, Lehman also claimed to be fully hedged before it went under.
After it issued this afternoon's statement, Jefferies stock recovered somewhat and was down only 7.7% an hour after its initial descent. However, the Wall Street Journal points out that the stock fell 9% on both Monday and Tuesday too.
Like MF Global, Jefferies probably falls into the category of not being big enough to fail. As a non-banking holding company it also lacks access to the Federal Reserve's discount window.
In the last accounts for Jefferies International, released up to November 30th 2010, it had 584 people working in London, amounting 19% of its global workforce. The bank has been doing a fair amount of hiring here. Only this week it revealed the appointment of Guy Cornelius from Nomura.
In an interview with Bloomberg yesterday, Richard Handler CEO of Jefferies said MF Global appeared to have gone under because it "placed a large bet designed to give it the earnings power to build an investment bank quickly."
On the other hand, Handler said Jefferies has been building an investment bank, "methodically," and using its "cash flow from existing core businesses to fund it."
Nevertheless, if something goes awry with Jefferies in the coming weeks and months, what could Jefferies' London employees do about it? The answer is: nothing much. Save maybe RBC, nowhere else is hiring. Jefferies UK employees can but wait, and hope.
