Jefferies Winning Battle Against Critics


Jefferies finally seems to be winning the battle against its critics—and the shorts.

The securities and investment banking firm is making real moves to respond to market jitters about its exposure to European debt.

And the strategy seems to be working. The put-call ratio—a measure of how much investors are betting against the company's stock—has fallen to 1.76-to-1 from 8.21-to-1 last Thursday.

The stock itself is down slightly for the day but not by much more than the broader indexes. And it's well off the lows reached Monday. The firm's shares have plunged 20 percent in the past month and are down 60 percent for the year.

But Jefferies is making progress in winning back confidence.

“We have further reduced our total gross exposure to Greece, Ireland, Italy, Portugal and Spain by almost another 50 percent (for a total reduction of nearly 75 percent); and our net exposure remains insignificant at net short $134 million,” the investment bank said in a letter posted to the firm’s website Monday.

The response by Jefferies, which got targeted after the collapse of MF Global led investors to fear that other mid-sized financial firms might also be over-exposed to losses on European sovereign debt, has been almost a model of how a bank should react in this situation.

Rather than providing vague reassurances about the quality of its balance sheet or blaming a panic for causing a market dislocation, Jefferies has responded with unprecedented transparency.

They listed on their all of the positions, including actual Cuspid numbers, for their exposures to the debt of Greece, Italy, Ireland, Portugal and Spain. They explained that they had reduced their positions through sales and actual short positions on debt, rather than through credit default swapswith possibly shaky counterparties.

But they were hit by another rumor: that they hadn’t actually sold their positions. Or, rather, that they had sold them to an affiliate, taking them off-balance sheet but not really reducing the exposure.

From Jefferies:

By now, everyone should recognize Jefferies is the firm with the least exposure to the sovereign debt of Greece, Ireland, Italy, Portugal and Spain of all of our major competitors. But, when we proved the first lie to be false, the next lie started. Last week, some irresponsible individuals began to spread the rumor that we had “sold our sovereign position to an affiliate” and effectively “parked” it there with an obligation to buy it back. This is a malicious lie. Our sales and trading team sold and covered our positions with unaffiliated third parties. To be crystal clear, Leucadia did not purchase one bond and we have no obligation to purchase anything back in the future from anyone.

The letter takes a very angry tone, blasting “malicious lies and false rumors.” According to Jefferies, the firm has been “barraged by a group of people maliciously spreading rumors, half-truths and outright lies through every means possible, including calling analysts and security holders, as well as using the mass media in an effort to amplify and legitimize their efforts.”

The firm says that a representative of one “large hedge fund” has been spreading false rumors about the firm. It says the representative sent a letter with a series of questions that demonstrate “an intentional misreading” of Jefferies’ public filings. The firm declined to say which fund it believes is involved.

"My sense is it will take a little while to get all the shorts out of the stock," says Michael Dion, Executive Director of Wealth Management, UBS. "But the balance sheet is relatively healthy, and they're relatively liquid. But when there's a run, its hard to get rid of that perception. Any perception when investors think capital is at risk, they'll look to close out trades."

For now, that perception is abating.

"I applaud Jefferies for getting everything in the open and letting people see it for what it is," Dion says.

—Jennifer Leigh Parker contributed to this report.

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