Friday, November 4, 2011

Financial institutions fall back on disclosure to restore confidence in their business: Jefferies edition

Following the lead of BNP Paribas and Societe Generale, Jefferies Group Inc. has turned to disclosure in an attempt to restore market confidence in its business.

As reported in a Bloomberg article, Jefferies has turned to disclosure to reassure skeptical investors.
The speed and severity of Jefferies Group Inc. (JEF)’s swoon shows how skeptical investors have become of Wall Street firms after the collapse of MF Global Holdings Ltd. reminded people of 2008. 
“The environment is that if you smell smoke, not even see it, then you’re going to worry,” said Kenneth Crawford, a senior portfolio manager at Argent Capital Management in St. Louis, with about $1.2 billion under management. “Given what MF Global did, that caution is not necessarily unwarranted.” 
Trading in Jefferies’s stock was halted twice yesterday and the shares plunged as much as 20 percent, the most ever, after Egan-Jones Ratings Co. downgraded the investment bank’s debt, citing large “sovereign obligations” relative to equity. Investors learned from the demise of Lehman Brothers Holdings Inc. and Bear Stearns Cos. that Wall Street wipeouts can be swift, prompting some to head for the exits now. 
“In an environment like this, people shoot first,” said Jeffrey Bronchick, chief investment officer and founder of Cove Street Capital LLC inLos Angeles, with about $325 million under management and about 500,000 shares of Jefferies. “Financials are complicated, many people don’t understand them.” .... 
For why they do not understand them, look at the quote from the investor at the end of this post.
Jefferies issued two statements yesterday, in addition to one earlier this week, that may have assuaged investors about its risk from European sovereign debt, which helped lead to MF Global’s collapse..... 
Egan-Jones cut New York-based Jefferies’s credit grade one level to BBB-, citing a “changed environment” amid concern that its $2.68 billion in “sovereign obligations” on Aug. 31 is large relative to equity. 
Within an hour of the start of trading yesterday on the New York Stock Exchange, Jefferies issued a statement aiming to reassure investors about the amount of its risk tied to the debt of PortugalItaly, Ireland, Greece and Spain
The company explained that the amount of European government bonds cited by Egan-Jones are balanced by “short positions” and futures, giving the company “net short exposure” of $38 million, or about 1 percent of equity. 
Two and a half hours later, with its shares still down as much as 10 percent, the investment bank published a “supplemental” statement to explain that it wasn’t relying on so-called credit-default swaps, contracts that require another party to pay Jefferies if the European debt holdings fail, to hedge the position.... 
The back-and-forth between Jefferies and its investors highlights how financial stocks have fallen out of favor with investors, said Juan Ocampo, president of New York-based Trajectory Asset Management LLC, which oversees about $250 million and doesn’t own Jefferies shares. ... 
“These firms are opaque and they’re big, complicated and leveraged,” Ocampo said. “There is a dichotomy between those investors who accept comments like, ‘Yes, we do have it hedged, we’re under control, we can run high leverage with that,’ and those who fundamentally now doubt it.” 

Jefferies has announced that it is going to provide utter transparency into its sovereign debt exposure.  They would only do so if it would show that they have nothing to hide.

In Jefferies' case utter transparency includes CUSIP level holdings for each country as of the end of the business day - presumably they will also disclose offsetting shorts or hedges.

Regular readers know that this is the asset level detail this blog has long advocated and it is a clear indication that utter transparency can be provided by financial institutions.

Jefferies' embrace of utter transparency signifies a complete rejection of the condescending position that market participants cannot analyze the data.

It is time for bankers to voluntarily provide or regulators to require this type of disclosure from all financial institutions.

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