Jefferies suffers as investors look for the next MF Global
As investors wonder which Wall Street firm might be the next to catch the cold that brought down MF Global last week, most of the suspicion has fallen on one originally founded in Los Angeles, Jefferies.
Investors have sent Jefferies stock down nearly 20% from before MF Global's bankruptcy, leading the firm to spend much of the last week beating off rumors that it may soon suffer from the same problems with European sovereign debt that brought down MF Global.
MF Global took a series of ultimately fatal bets on the bonds of struggling European nations, causing clients to worry that MF Global would find itself unable to sell those bonds and unable to carry out other customer business. That fear proved contagious and ultimately sunk MF Global, according to industry experts.
Just this morning, Jefferies announced that it took the highly unusual step over the weekend of selling off 50% of its holdings of European bonds, just to show that it could.
"We undertook this reduction in our holdings solely to demonstrate the liquid nature of this market-making trading book,” Jefferies Chief Executive Richard Handler said in a statement explaining the move.
The big bets on European bonds at MF Global were part of a strategy -- initiated by its recently hired chief executive, Jon Corzine -- to expand the firm through risky bets made with the company's own funds.
Jefferies has had a similar business model to MF Global's -- at least before Corzine took over -- but Jefferies executives have been trying to convince investors that they did not take the kind of bets that Corzine pushed for at MF Global.
Last week, Handler released a full accounting of Jefferies' holdings of European bonds.
"We decided the only way to conclusively dispel rumors, misinformation and misplaced concerns is with unprecedented transparency about internal information that is rarely, if ever, publicly disclosed," Handler said in a statement on Nov. 4.
That was not enough to calm worried investors. The stock price continued to sink, leading to the unusual moves over the weekend. This morning, those moves gave Jefferies stock an initial boost, but it has recently sunk down again almost to the level where it closed Friday afternoon. It is currently trading up 1.6%, or 19 cents, to $12.26.
A columnist at the Wall Street Journal this morning wrote evocatively that Jefferies is "being strip-searched at gunpoint by the markets."
-- Nathaniel Popper in New York