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Jefferies Dumps Europe

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Jefferies Group dramatically reduced its gross exposure to Europe over the weekend.

The firm sold off $1.1 billion of both long and short positions on the sovereign debt of Italy, Ireland, Greece, Portugal, and Spain. The firm says that is 49.5 percent reduction in its gross holdings since the close of business Friday.

Last week Jefferies revealed that it had $2.864 billion of long inventory and offsetting short positions of $2.545 billion.

So that leaves them with about $1.7 billion in long positions and $1.445 billion in short position.

Jefferies has been fighting back against the notion that it could be "next." Which is to say, that it could be the next firm to fail based on exposure to European sovereign debt after MF Global Holdings.

The tactic Jefferies has taken is unprecedented transparency, and that seems to have worked to stop its stock slide.

At first, Jefferies began by exposing its "net" positions— that is, its positions after hedges were taken into account — in the debt of the countries causing the most concern. This caused many to worry that if the hedges were credit default swaps , they might only be as strong as Jefferies counterparties and collateral held.

Jefferies then explained that its short positions were not credit default swaps, but short sales on the securities and futures. And on Friday, it went more transparent on its exposurethan any firm I've ever seen.

Now Jefferies has moved another step, explaining that it is reducing even these exposures. In short, Jefferies has totally exited half its trades in Europe.

One telling detail is that Jefferies sold off the positions with "no meaningful profit or loss." This seems to confirm what Jefferies has been insisting: that these positions were held very short term, held at current market values, and correctly hedged.

Jefferies says that its current net exposure to these sovereign securities is currently $59 million, or 1.7 percent of shareholder equity, with negligible market or credit risk.

One question is who is buying this risk off Jefferies books? Is someone loading up on Europe's sovereign debt?

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