Trusting transparency will work -- Jefferies redux

Andrew Ross Sorkin wrote a NY Times Dealbook article on Jeffries and transparency.  The article reflects the Wall Street Opacity Protection Team at its finest.

Mr. Sorkin presents the idea that there is a logical stopping point between current financial reporting and ultra transparency.  Ultra transparency involves each financial institution disclosing on an on-going basis its current asset, liability and off-balance sheet exposure detail.

Regular readers know that there is no logical stopping point as it is the data provided with ultra transparency that market participants need to assess the risk of the financial institution.

It is ironic that he focuses on Jefferies.  Less than a month ago, when doubts were raised about its solvency, Jefferies promised to provide ultra transparency.

It bowed to pressure from Wall Street's Opacity Protection Team and did not do so.  Instead it provided summary level long/short detail and a listing of the CUSIPs for the bonds it was either long or short.  In addition, it closed out half of its positions.

To no-one's surprise, this was unsatisfactory.  It did not provide the data that market participants needed to assess the risk of Jefferies being insolvent.

Now, Jefferies finds itself under pressure again and its CEO is mad that market participants do not "trust" him given the limited data release and the closing out of the positions.

Frankly, why should they?  The limited data release was the equivalent of waving a red flag and announcing that Jefferies has something to hide!

Mr. Handler’s letter ricocheted around Wall Street on Monday as investors and analysts pored over its granular details seeking to assure the markets and gossiped about the firm’s effort to address virtually every rumor imaginable. The letter included headings like “Lies About Our Inventory of Sovereign Debt,” “Alleged ‘Mass Exodus’ of Prime Brokerage Clients” and “False Rumors About Fourth Quarter.” 

The letter, which Mr. Handler said he debated writing at all, appeared to soothe investors — at least for the moment. On a day in which the S.& P. 500 fell 1.86 percent — led by shares of financial companies — shares of Jefferies were up 0.39 percent. 

But the letter, as transparent and thorough as it was, led some investors to think of Shakespeare’s line in Hamlet: “The lady doth protest too much, methinks.”

The letter is a trust me letter and given what has happened to financial institutions since 2007, investors are not in a trusting mode.

For financial services firms, it is the ultimate Catch-22: provide too little information to the public, and you are quickly attacked for hiding and not being transparent enough; provide too much information and you are doubted for being a bit too solicitous.

Providing ultra transparency does not make a firm solicitous.  It is a sign that the firm can stand on its own two feet. 

It is a conundrum that many on Wall Street have faced and one that has challenged Mr. Handler over the last several weeks as he has sought to refute rumor after rumor as if he were in hand-to-hand combat. 

“It just became apparent that the more we did to be open and transparent, the more falsehoods were spread and we needed a venue to get the whole truth out,” he said. “No one wants to write a letter like this, especially people like us who never seek attention.”

Actually, Jefferies actions were all about protecting opacity. Witness the writing of a letter rather than providing position level detail.

Jefferies has already shown it has a venue to get the whole truth out by showing the ability to post information on its web site.  It simply needs to disclose all its current detailed data.

With this data, market participants can separate fact from fiction.  It is only when market participants can independently assess what is going on that they have confidence in the analysis.  This is exactly what Jefferies should want.

Jefferies has been under the spotlight as questions have swirled about its exposure to European sovereign debt and about its very business model. The firm’s shares have fallen 20 percent in the last month as MF Global collapsed, and they are down 60 percent for the year. The Egan-Jones Ratings Company downgraded the investment bank’s debt earlier this month, sending the firm’s shares reeling. 

Mr. Handler, a veteran of Drexel Burnham Lambert who watched that firm implode as its counterparties evaporated overnight amid an insider-trading scandal, has taken an unusually aggressive approach to transparency in hopes of retaining the trust of the markets.

Without ultra transparency, there is no reason for the market to trust Jefferies.  Their approach has been to provide the markets with useless data as oppose to all the useful, relevant information in an appropriate, timely manner.

MF Global learned that the hard way. Though it is rarely remarked upon, MF Global didn’t go bankrupt because it lost money. Instead, it lost something much more important: confidence....

Against that backdrop, to prove to the markets that Jefferies’ stakes in European sovereign debt were liquid and properly accounted for, Mr. Handler sold half of the firm’s exposure to the sovereign debt of Portugal, Italy, Ireland, Greece and Spain over a weekend earlier this month — worth some $1.1 billion. 

“We undertook this reduction in our holdings solely to demonstrate the liquid nature of this market-making trading book,” he said at the time. And then on Monday, it said it cut its exposure 50 percent again. 

The firm even went so far as to list online every ID number for each bond that it owned along with each position by country and maturity to prove that the firm was not using exotic derivative or credit default swaps to hedge its investments. 

Sean Egan, a co-founder of Egan-Jones, said he sympathized with Mr. Handler’s plight, but Jefferies’ public proclamations haven’t changed his outlook on the firm....

Back in the spring of 2008, when Lehman Brothers came under pressure from short-sellers, the firm went on a charm offensive. Lehman told anyone who would listen that it was under attack from short-sellers, and it tried to walk investors through its investment positions. “I will hurt the shorts, and that is my goal,”Richard S. Fuld Jr., the firm’s former chief executive, famously fumed five months before the firm’s bankruptcy. 

But Jefferies is doing the one thing Lehman didn’t — or perhaps couldn’t: selling off the worrisome assets. The question now is, will that be enough?

As a market maker, why sell when you can simply provide ultra transparency instead?  Is it because Jefferies is under pressure from the larger Wall Street firms who know that if Jefferies provides ultra transparency it will be expected of them too?