Jefferies Group Inc. Chief Executive Richard Handler says 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 says. "We have always used our capital to facilitate clients rather than taking large proprietary bets."
Executives at Jefferies, whose shares have plunged 16% 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 exposure to MF
Global debt 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 brokerage run by Jon Corzine, bet $6.3 billion on Italian, Spanish, Belgian, Portuguese and Irish debt, it said in a presentation on Oct. 25.
Concerns that the firm might lose money on the holdings during Europe's debt crisis led to credit downgrades, margin calls, regulators' demands to boost capital and bankruptcy, MF Global President Bradley Abelow has said.
"It appears MF placed a large bet designed to give it the earnings power to build an investment bank quickly," Handler says. "Jefferies has been building its investment bank methodically for over 20 years and using our cash flow from existing core businesses to fund it."
MF Global's $6.3 billion wager "wasn't part of market-making," says Brian Friedman, chairman of the executive committee of Jefferies. "It was simply an outsized directional bet. We don't do that."
Douglas Sipkin, an analyst at Ticonderoga Securities LLC, says 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 says.
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 says.
