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Leucadia to the Rescue After Jefferies Rescued Knight Capital

Monday's deal completes a frenetic year for Jefferies. In early November 2011, independent ratings firm Egan Jones cut Jefferies bond ratings to BBB- citing the bank's near $3 billion exposure to European government debts, which it said represented 77% of the firm's shareholder equity.

Shares plummeted 20% and prompted Jefferies and its long-time chief executive Jeffrey Handler to liquidate the firm's European debt position by the end of 2011, in a quick move that cut against some of the worst-case scenarios Egan Jones had expressed.

Jefferies started 2012 on new footing and without analysts predicting its demise. After taking a 22.8% stake in and advising Knight Capital on its rescue efforts, Jefferies posted record third quarter results in September. Still underlying the firm's record profit - largely due to its Knight Capital stake -- were weak results in its core trading and investment banking business that augured poorly for its future.

Excluding the stake in Knight Capital, Jefferies missed profit expectations, according to analysts polled by Thomson Reuters, as core investment banking and trading businesses showed a slowing in revenue over the course of 2012.

While Handler saw results as evidence of "the best nine-month period in our firm's history," and a balance sheet in record-strong position, according to a statement released with earnings, investors and ratings agencies saw differently.

In mid-October, Moody's cut Jefferies bond ratings to a step above junk, citing the firm's increasing need of capital as it expands trading and investment banking businesses.

"Since the onset of the financial crisis in 2007, Jefferies has grown significantly and opportunistically," Moody's said. "This growth also introduces risks as the firm integrates the people and operations that it has acquired, and establishes long-term discipline around risk-taking."

The downgrade and Jefferies subsequent deal with Leucadia in a matter of weeks indicates that the investment bank was in need of capital or a strategic partner to survive a new trading environment on Wall Street of higher capital costs and diminished revenue opportunities.

In the financial crisis, investment banks like Bear Stearns and Merrill Lynch fell into the arms of larger players like JPMorgan and Bank of America. Meanwhile, other independent Wall Street players like Lehman Brothers and MF Global fell to bankruptcy.

Earlier in November, financial sector advisory firm KBW (KBW) said it will be acquired by St. Louis-based investment firm Stifel Financial (SF) for $575 million, in a deal that had little premium attached to it.

-- Written by Antoine Gara in New York

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