Jefferies, a $2.4bn (£1.5bn) investment bank based in New York, appeared last night to have nipped in the bud a market panic over its exposure to eurozone sovereign debt, after a day of yo-yo share price action that highlighted the febrile state of financial markets in the wake of the failure of MF Global.
Trading in Jefferies' shares had to be temporarily halted by the New York Stock Exchange amid intense selling pressure, which pushed the stock down 20 per cent in a matter of minutes. The trigger was a downgrade to the credit rating of Jefferies' bonds by a mid-tier credit rating agency called Egan-Jones, which cited the company's $2.7bn in exposure to sovereign debt and said it should raise new capital because of the gathering risks from those positions.
The company spent the rest of the day in a war of words with the Egan-Jones founder Sean Egan over the accuracy of his analysis, and its shares rebounded to trade only 7 per cent lower.
Jefferies has been in the sights of short-sellers and speculators since MF Global's failure on Monday, which revealed the speed with which confidence can evaporate from a financial institution. A week earlier, MF Global had seemed like a sound broker-dealer business, headed by the respected Jon Corzine, a former chief executive of Goldman Sachs, but it collapsed within days of revealing that it had bet $6.3bn on eurozone government debt. Clients and trading partners withdrew their businesses and the company's sources of funding dried up.
Jefferies had been the underwriter of MF Global's last fundraising, a $325m bond sale in August. On Monday it said it had no significant exposure to MF Global bonds, and on Tuesday it said it had no significant exposure to eurozone sovereign debt, but its shares continued to face pressure.
And as the stock went into freefall mid-way through morning trading yesterday, the company responded to the Egan-Jones downgrade by saying the $2.7bn exposure to sovereign debt is offset by $2.5bn in hedges, namely, short-sales of sovereign bonds. Its net exposure includes $5m to Portugal, $28m to Ireland, $104m to Italy and $3m to Greece – all tiny positions.
Mr Egan, in a television interview in which he was accused of stoking a panic, said that companies cannot rely on hedges to work as they are expected in the event of a market meltdown, and the volatile market atmosphere since MF Global's collapse justifies his demand for a new capital raise. "Jefferies is an incredible franchise, and we hope it lives for another 100 years," he said, adding: "As was Lehman Brothers."
Regulators and administrators are still trying to piece together the last days of MF Global, and to determine why some $633m that was supposed to be in segregated client accounts in the US is not accounted for.Reuse content