Ticonderoga Securities Research released a note this morning outlining why there may be continued troubles at Jefferies. And it has nothing to do with European debt.
Two big points Ticonderoga made for their case:
– Upcoming regulations on the financial industry, which smaller security firms like MF Global and Jefferies would have ducked under, may be made more stringent.
The primary appeal and promise of growth for small independent broker-dealers like MF Global and Jefferies was the fact that they would not have been held back by new financial regulations that would have limited bigger systemically important banks. But the fall of MF Global may mean more regulation on smaller financial firms – which could bring mean more rules (which increase operational costs of enforcement), higher capital requirements, etc.
– The short-term financing model may no longer be effective or even allowed.
Firms like Jefferies and MF Global depend on short-term financing to run its operations (using loans that need to be paid back within a year), but that model is being discouraged by regulators and may soon be limited by new rules. In addition, the report noted “cracks in the risk free market” may prove a further challenge to short-term financing for Jefferies, as the company has benefited from that market in the past. Ticonderoga analysts also said the investment bank will need to significantly lower its debt levels before it can even begin shirking from short-term financing. Bloomberg View columnist William Cohan iterated this fact also yesterday when he said Jefferies was “not out of the woods yet” due to its reliance on short-term financing.
One thing not on the Ticonderoga report – Sean Egan, who has become a sort of financial prophet after correctly predicting the downfall of MF Global, said on CNBC this morning his ratings company Egan-Jones was sticking with their Jefferies downgrade. That should count for something too, right?