Anyone who has worked on Wall Street for 20+ years will tell you it’s not what it used to be. Firms are bigger, compliance stricter, technology bolder. But in a corner of New York, there’s a firm that tries hard to retain the magic. “Jefferies is a story of Wall Street in a world that doesn’t have a lot of Wall Street left in it,” its president, Brian Friedman said a few years back. With a headcount of 6,000 – far fewer than the 48,300 employed at Goldman Sachs or 94,200 in the commercial and investment bank at JPMorgan – the firm embraces old-school principles. “Meritocracy, always,” Friedman and his CEO, Rich Handler, wrote in a memo earlier this month, and “long-term greedy.”
The pair list thirteen principles in total. Waking up (and going to sleep) thinking about clients is a given, but the firm’s small size affords it some luxuries. “Politics, emotion, alternative agendas, short-term thinking, and bureaucracy destroy organizations and must be snuffed out relentlessly,” is one. Another is that “it is…okay to admit when you are wrong and pivot.” It’s the thirteenth principle, though, that is currently being tested. “Arrogance leads to mistakes and upsets,” Rich and Brian declare. “We take nothing for granted at Jefferies and embrace the fact that we have to prove ourselves worthy every single day to every constituency that we are so fortunate to serve.”
Since hitting send on the memo, they’ve been summoned by markets and by clients to prove themselves worthy. Last week, they revealed that a subsidiary in their asset management division, Point Bonita Capital, holds $715 million of assets linked to bankrupt auto parts manufacturer First Brands Group, representing nearly a quarter of its $3 billion trade-finance portfolio (which is backed by $1.9 billion of invested equity). As an investor in the fund itself, Jefferies has $43 million of direct exposure (plus $2 million from other sources) but it’s the reputational fallout from the subsidiary’s risk management practices that may prove more harmful. Unsurprisingly, the market doesn’t like it. Since mid-September, when First Brands’ advisers began to explore a bankruptcy, Jefferies stock is down 30%, wiping $3.8 billion off its market value. That the drop is more than 85 times the firm’s direct exposure reflects investors’ broader concerns.
Rich and Brian have been around a long time – reminding us among their thirteen principles that they have led the firm for 25 years – so they’ve seen this kind of thing before. They will remember how in 2007, another scrappy firm oversaw losses on funds in its asset management subsidiary. Bear Stearns had run a ‘high-grade structured credit strategies fund’ from within its asset management division since 2003 and, in 2006, it added a higher-leveraged, higher-risk ‘enhanced fund’ alongside it. Both funds were heavily exposed to subprime mortgage-backed CDOs. After marking the enhanced fund down 6.6% in April, losses accelerated as these securities plunged in value. By July, the high-grade fund was down 91% and the enhanced fund had lost everything. At the end of the month, both filed for bankruptcy.
On Sunday, Rich and Brian came out fighting. “There has been an impact on our equity market value and credit perception that is meaningfully overdone,” they wrote in a letter to clients, stakeholders and friends of Jefferies. It doesn’t normally bode well when you have to tell market participants that you have ample liquidity on a Sunday night, but the pair went for it, detailing the firm’s financial attributes. Yesterday, they hosted an annual investor meeting where they delivered similar messages.
Jefferies is used to taking hits. In 1987, it fell under the spotlight after its founder pleaded guilty to securities fraud and was banned from the industry. It survived the global financial crisis, but came under pressure a couple of years later when the sovereign debt crisis flared up in Europe. As CEO, Rich has swatted away multiple threats including from failed investment firm Archegos when he instructed his traders to eliminate all exposure in the time it took him to fetch a spicy margarita. But the firm is now larger, having set out on a quest to become the fifth biggest investment bank on Wall Street. To see how it got here and what lies ahead, read on.