Jefferies, responding to its plunging shares and growing fear over its stability, said it had no meaningful net exposure to European sovereign debt and that it was, in fact, positioned to profit should credit quality there deteriorate further.
The statement on Thursday, meant to clarify the U.S. investment bank's trading positions and rebut an analyst downgrade this week, comes days after broker-dealer MF Global Holdings
Shares of Jefferies Group Inc
The shares bounced back after the company's statement, but were still down 4.7 percent by early afternoon, making for a decline of more than 20 percent so far this week.
Jefferies said it had a short position on $178 million of Spanish debt -- a position that profits as Spanish debt weakens -- and exposure to about $140 million of debt from other European nations, including $104 million to Italy.
Its net short exposure of about $38 million was equal to about 1 percent of its net worth, or shareholders equity, Jefferies said. Positions in such debt are short-term and are marked to market daily, it added.
In a second statement on Thursday, Jefferies added that its short positions were done using securities, not credit default swaps. Credit default swaps have proven to be relatively ineffective at hedging some European exposure.
After seeing MF Global go down due to leverage and a dysfunctional EU, investors, counterparties and creditors are very nervous -- it's a fire first, ask questions later type of market, said Brad Hintz, analyst at Sanford C. Bernstein.
As of August 31, Jefferies had shareholders' equity of $3.49 billion, supporting $45.13 billion of assets, according to a regulatory filing. That means its assets were about 13 times its equity, compared with more than 30 times for MF Global.
MF Global shed two thirds of its market capitalization last week as its credit ratings were cut to junk and confidence evaporated in the firm run by former Goldman Sachs executive Jon Corzine.
On Wednesday, ratings agency Egan-Jones downgraded Jefferies due to concerns about its sovereign debt exposure. In a research report, Egan-Jones said the exposure was 77 percent of shareholder equity, which in part helped to undercut Jefferies shares.
Said Dick Bove, analyst at Rochdale Securities, What is happening is the money that was used to short MF Global is going over and being used to short Jefferies.
Exposure to European debt has hurt European banks and, particularly with MF Global, begun hurting U.S. firms.
Investors and ratings agencies often look to a firm's liquidity position to determine their ability to weather any fears about the bank's stability. Jefferies had $2.01 billion in cash and equivalents on August 31, according to the filing.
Short sellers brought MF Global down because it did not have a huge amount of liquidity. Now they're targeting Jefferies, said Bove.
Jefferies' relatively high short-term debt funding may make it vulnerable, Bove said.
Jefferies said it has a few routine regulatory reviews in process, all of which insignificant in scope and absolutely immaterial to the bank.
(Additional reporting by Dan Wilchins in New York, editing by Gerald E. McCormick, Ted Kerr and Gunna Dickson)