Monday, November 7, 2011

After failing to disclose the detail it promised, Jefferies sells half its sovereign debt book

Chalk up another victory for Wall Street's Opacity Protection Team as Jefferies, in a bid to escape market discipline, sells half of its sovereign debt book.

Last week, Jefferies' chairman and CEO promised to release its current detailed exposure data after the close of business Friday.

This promise was a severe problem for Wall Street's Opacity Protection Team as it destroyed several myths about banks making detailed disclosure.  The myths destroyed include:

  • Market participants wouldn't be able to analyze the data - clearly, they can;
  • This data cannot be made available at the end of every business day - clearly it can as it comes from the firm's electronic information systems; and
  • Wall Street could not be market makers if everyone knew each firm's exposures - clearly it can, but it does reduce the profitability of proprietary trading trying to disguise itself as market making.
Wall Street's Opacity Protection Team sprung into action.  The result was that the data Jefferies disclosed ended up being a woefully inadequate list of all the securities owned by country.

What was not included in this data was the useful, relevant information like the amount of each security owned by Jefferies.

Market analysts immediately recognized how valueless this data dump was and focused their ire on the complete lack of disclosure of the counter-parties that were supposedly hedging this portfolio.

To no one's surprise, Jefferies announced that it had sold half of its sovereign debt book this morning in an attempt to say that its sovereign debt portfolio is liquid.  

The hope of course is that this will stop market participants from asking any more questions about the value of the remaining debt portfolio, which may or may not be liquid. 

But why should they?  Presumably what was sold was the most liquid securities that could be sold without taking a significant loss.

Are the positions that Jefferies has left in such bad shape that the firm is insolvent?  Without detailed disclosure, how are market participants suppose to know?


NEW YORK and LONDON, November 7, 2011 – Jefferies announced today that its trading positions in the sovereign securities of the nations of Portugal, Italy, Ireland, Greece, and Spain have been reduced by an aggregate of approximately $1.1 billion long and $1.1 billion short. This represents a 49.5% reduction in Jefferies’ gross holdings of these securities since the close of business Friday and resulted in no meaningful profit or loss on today’s trading activity or our remaining positions, which continue to be substantially matched by country and maturity. Jefferies’ current net exposure to these sovereign securities is currently $59 million, or 1.7% of shareholder equity, with negligible market or credit risk.

“We undertook this reduction in our holdings solely to demonstrate the liquid nature of this market-making trading book,” said Richard Handler, Chairman and CEO, and Brian Friedman, Chairman of the Executive Committee of Jefferies, in a joint statement. “We will now resume our normal market-making activities and serve our clients around the world.”

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