Is Jefferies Next?

Even as Jefferies Group continues to cut its hedge fund exposure following three consecutive quarters of losses by its asset management division, it is expanding into mortgage-backed securities. What could one possibly have to do with the other — that’s what inquiring minds want to know:

Mortgages are often packaged and sold to institutional investors as securities. But surging delinquencies and defaults have dented the value of some mortgage-backed securities.

Securitization volumes have slumped since last summer, leading to lower revenue and steep losses at leading mortgage underwriters such as Bear Stearns Cos. and Lehman.

Since when did the asset backed mortgage business become such a safe bet? Well according to Jefferies it hasn’t:

While expanding into the mortgage market during such turmoil may be risky, Jefferies said it’s taking the opportunity to hire talent who may be leaving bigger firms.

“This expansion is consistent with Jefferies’ ongoing and broad desire to take advantage of market dislocations and the occasional availability of exceptional individuals,” said Richard Handler, chief executive of New York-based Jefferies, in a statement.

 

Are big losses in trading forcing big risks into the asset back toilet-paper market? One clue can be found in just how serious management views the losses. The New York based investment bank swung to a first quarter loss of $60.1 million on revenue half of what it was for the same period the previous year. The losses were viewed sufficient for the bank to raise cash:

Jefferies is issuing $100 million cash and 26.6 million shares to Leucadia National Corp., and will receive about $533.6 million in Leucadia stock. Jefferies can sell its new shares right away to raise cash, but Leucadia must wait two years.

More significantly Fitch Ratings lowered the outlook on the ratings of Jefferies.

“Weak investment banking and sales and trading revenues combined with a relatively inflexible short-term cost structure will likely lead to weak earnings in the near-term,” Fitch said. However, Fitch notes that Jefferies has taken steps to reduce its risk appetite and costs and to enhance its liquidity profile since the end of 2007.

So can we say management is threatened enough to do the dirty desperate and despicable Asset Back Garbage? We can only ask, but not tell.

But can’t you already tell that the risk it isn’t such a risk? For an insolvent bank (all of them according to Mish) reeling from deep consecutive losses in a market in which no one except the NAR believes is improving in their own lifetime, it’s not such a bad idea.

There are shades of Merrill and UBS here — doubling-down into a market that is falling apart, hoping naively to emerge the victor.  It is a risky bet, except, typically, for bank execs.

Failure absent the mortgage market way is 100% guaranteed. But a little foray into the subprime/ABS market will as it always has temporarly boost profits share prices and the value of stock options so dearly held by insiders. A little bounce is all anyone really needs to sell out before the company rolls over. And from the observed shenanigans to date it seems that the bailout is a priori priced in.

Posted in BREAKING NEWS! | No Comments »