Sean Egan, president of the ratings company Egan-Jones, appeared on CNBC this morning to talk about his firm’s reasoning for downgrading investment bank Jefferies.
The downgrade of Jefferies to BBB- last night sent a shock through the company’s stock, which traded as low as $9.79 this morning before it was halted briefly from trading. Jefferies’ then came out with a statement that clarified the company’s positions on European debt.
The stock has rebounded sharply.
Some of Egan’s main points:
- The operating environment has changed in the wake of Lehman Brothers and MF Global. They hope that Jefferies’ short positions in European debt do offset the long, but there is no “complete comfort” in that.
- Egan told Jefferies if they went public with their European positions, they might change their ratings. But he added that it looks like a change is unlikely right now.
- The ratings cut is not a “huge move,” Egan-Jones want to see how the company responds.
- Jefferies should raise more capital. Their 13 to 1 leverage is a lot better than MF Global’s 40 to 1 leverage when they fell, but it is not good enough. Banks are suppose to have 9 to 1 leverage, and Jefferies has a lot more risk because they are not a bank. They do not have deposits that are insured by the federal government. “The fundamental business is riskier than the typical bank.”
- There is a lot more worry over the issuers of the debt rather than the European country the debt belongs to. For example, there is increasing worry about Italian corporations that have seen their funding costs rise over 200 basis points in the last year.
- Egan wants full disclosure of Jefferies’ positions in Europe. Want more transparency in their derivatives operations also.
Oh, and a great quote from Egan: “The lessons learned from Bear Sterns, Lehman Brothers, MF Global is that there has been massive hubris…”