Jefferies Group Inc. (JEF) Chief Executive Officer Richard Handler said the investment bank is shunning risk-taking that could undermine its stability because the U.S. probably wouldn’t rescue the firm in an emergency.
“We have always been cognizant of the fact that we’re not too big to fail and operate accordingly as we manage risk, diversification, liquidity and capital,” Handler, 50, said in an interview yesterday after MF Global Holdings Ltd. (MF) filed for bankruptcy. “We have always used our capital to facilitate clients rather than taking large proprietary bets.”
Executives at Jefferies, which has dropped 7.5 percent this week, aim to ease investor concern that MF Global’s Oct. 31 collapse will result in losses at their firm. Jefferies said in statements this week that its risk to MF Global debt securities is less than $9 million after it arranged a $325 million bond sale in August and that it has “no meaningful exposure” to debt issued by Portugal, Italy, Ireland, Greece and Spain.
MF Global, the futures broker run by Jon Corzine, bet $6.3 billion on Italian, Spanish, Belgian, Portuguese and Irish debt, it said in an Oct. 25 presentation. Concerns that the firm might lose money on the holdings amid Europe’s debt crisis led to credit downgrades, margin calls, regulators’ demands to boost capital and bankruptcy, MF Global President Bradley Abelow said.
“It appears MF placed a large bet designed to give it the earnings power to build an investment bank quickly,” Handler said during the interview at Jefferies’ New York headquarters. “Jefferies has been building its investment bank methodically for over 20 years and using our cash flow from existing core businesses to fund it.”
‘We Don’t Do That’
MF Global’s $6.3 billion wager “wasn’t part of market- making,” Brian Friedman, chairman of the executive committee of Jefferies, said in the interview. “It was simply an outsized directional bet. We don’t do that.”
Jefferies rose 2.2 percent to $12.27 in New York. The shares have tumbled 54 percent this year, the worst performance in the 11-company NYSE Arca Securities Broker/Dealer Index.
Douglas Sipkin, an analyst at Ticonderoga Securities LLC, said investors are concerned that MF Global’s collapse may invite more regulation of broker-dealers and crimp profit.
“Jefferies is much bigger and better and more diverse than MF,” Sipkin said yesterday in an e-mail.
Jefferies’ balance sheet is a source of strength as its leverage ratio, a measure of total assets divided by stockholders’ equity, is similar to what it was in 2008 when the company weathered the financial crisis without taking a government bailout, Handler said.
The firm has 97 percent Level I and II assets, giving the balance sheet a “tremendous amount of liquidity,” Friedman said. Level III assets comprise about 3 percent of the firm’s balance sheet, about the same as in 2008, Handler said.
“While Level III assets at MF were also technically low, their effectively illiquid $6.3 billion off-balance sheet sovereign instrument is extremely large relative to their total capital and required increasing amounts of capital to fund,” Handler said.
He said Jefferies has “great sympathy” for MF Global’s employees.