NEW YORK (Reuters) - Jefferies Group Inc decided not to buy MF Global Holdings Ltd because the company’s high leverage and its bets on European debt made it a risky gamble, Jefferies Chief Financial Officer Peregrine Broadbent said on Tuesday.
Jefferies’ shares tumbled as much as 14 percent as investors feared that the investment bank, another relatively small Wall Street player, could get burned by bad bets on Europe the same way MF Global did, analysts said.
But Broadbent said Jefferies’ exposure to debt of Portugal, Ireland, Italy, Greece and Spain is “minute” and emphasized that the investment bank does not make bets with its own capital the way MF Global did.
“We hold inventory on our books and turn it over very rapidly to meet our client requirements,” Broadbent said. “Our exposure is minute and changes very rapidly -- long a little bit and short a little bit in the PIIGS countries.”
Jefferies’ overall exposure to those countries is typically within a $100 million range long or short, he said. Jefferies is most exposed to Italy, he said, because the bank acts as a dealer for the government’s debt. Exposure to other risky countries is typically less than $20 million apiece, he said.
Jefferies hedges its exposure to debt it buys as a market maker by selling securities short rather than using credit default swaps, he added.
In recent days, investors have become worried that U.S. banks’ hedges against risk in Europe using credit default swaps may provide less protection against deteriorating credit quality than banks had hoped for.
Jefferies shares closed down 9.4 percent at $12.01 on Tuesday, up from an intraday low of $11.41, as threats to a proposed Greek bailout and reports that MF Global may have improperly mixed clients’ funds with its own capital sent new shivers through the market. Shares of competing financial firms also declined, but not as much as Jefferies.
Broadbent said he spent the weekend at MF Global offices examining its financial statements to see whether any of its businesses were worth purchasing.
Jefferies did not agree to a deal because MF Global’s business lines and culture did not fit well with his company, Broadbent said.
“There was no way we would put on a transaction that would attract all the attention and problems that it did,” he said.
MF Global filed for Chapter 11 on Monday after days of intense pressure from clients, regulators and ratings agencies over its exposure to European debt.
Last week, the company outlined a net long position of $6.3 billion in sovereign debt of Belgium, Italy, Spain, Portugal and Ireland, compared with $1.2 billion in equity. Within days, its shares plunged to $1.20 and Moody’s downgraded its credit to junk.
Broadbent said Jefferies would not take on that kind of exposure because it does not do the kind of proprietary trading that got MF Global into trouble.
“We’re not a proprietary business and would not put on a transaction of that size,” he said.
Broadbent said that after having reviewed the company’s financial statements, he did not believe there was any purposeful misuse of clients’ money.
“I think what we’ll probably see with MF Global -- notwithstanding this current problem with their client money going missing, although I think that’s probably a mechanical problem -- is that clients will get their money back in full,” he said.
Reporting by Lauren Tara LaCapra in New York; editing by Dan Wilchins, Phil Berlowitz