NEW YORK (
are in a reputation battle of Wall Street welterweights that cost either firm the most prized banking commodity -- credibility.
Jefferies on Monday released a six-page letter to address markets being informed about its strength by, "half-truths, false rumors and lies being disseminated with malice." The letter, while addressed to unnamed "irresponsible" individuals, cites data points intended to buck ratings firm Egan Jones and its November reports, which have sent Jefferies shares nearly 20% lower.
Jefferies competes in investment banking activities against the likes of
that all have balance sheets ten times larger, and also against higher market cap brokerages
. Because of its scrappy nature, small dings to their reputation may be more destructive than multi-million dollar suits filed against larger competitors.
Meanwhile, Egan Jones competes against ratings behemoths Moody's, Standard & Poor's and Fitch Ratings but has just five analysts and 14,000 ratings -- a miniscule size compared to the over half million corporate ratings that earn its competitors billions in sales. If they are proved wrong about Jefferies, it could be a knock-out punch to the firm's ascendance.
Both firms, nevertheless, have provided ample competition against their larger peers.
Jefferies, which provides essentially the same financial offerings as powerhouses like Goldman, has a a specialty in advising restructurings and M&A, while it's also strong in underwriting IPOs and high yield debt. In U.S M&A and IPOs, Jefferies is near the top 10 with market shares that are only second to some of the biggest banking conglomerates in the world. The investment house also didn't need government bailout funds to survive the crisis, unlike some competitors.
On the other side of the boxing ring is, Sean Egan a co-founder of Egan Jones, who was called by
the number one person to who saw the crisis coming - ahead of Nouriel Roubini, David Einhorn and John Paulson. Egan Jones won the honor after giving harsher ratings assessments to
prior to their bankruptcies than the big three ratings agencies.
On November 2, Egan Jones cut Jefferies ratings to BBB- from BBB, prompting the New York -based company's shares to tumble 20% to post crisis lows below $10 a share. It sparked a fight between two reputable but small players, which has culminated in today's heavyweight uppercut jab by Jefferies and its chief executive of over a decade, Rich Handler.
In Monday's letter, Jefferies wrote "throughout the month of November, Jefferies has been barraged by a group of people maliciously spreading rumors, half-truths and outright lies through every means possible." The biggest half-truth Jefferies highlighted was an alleged exposure to peripheral European debt.
In a Nov. 2 report, Egan Jones wrote that "we are concerned about the values included in the $2.7
billion of "sovereign debt" obligations...representing 77% of shareholders equity." The number excluded offsetting derivative hedges to debt positions that made Jefferies net exposure to debts negligible.
Of the ratings note, Jefferies wrote, "We were both shocked and perversely amused when the analyst who first misled the public about our sovereign debt exposure being 77% of our shareholders' equity actually had the temerity to state on widely broadcast television that he omitted the material fact that we had almost equal and offsetting short sovereign debt positions because, and we quote, he had "space constraints."
Later, on Nov. 7, Jefferies reported that it liquidated nearly 50% of its gross sovereign debt exposure, or $2.2 billion, with "no meaningful profit or loss" and in today's letter the company wrote "by now, everyone should recognize Jefferies is the firm with the least exposure to the sovereign debt of Greece, Ireland, Italy, Portugal and Spain of all of our major competitors."
After the liquidation and the Jefferies press release, Egan Jones then issued a new ratings note that said, "missing the point - the primary reason for our cutting last week was the changed environment. The problems of MF (e.g., the debilitating freezing of 150K accounts) have increased scrutiny of other medium-sized broker dealers. The secondary issue for our cut was leverage," citing Jefferies's 12.9 times leverage ratio.
About the ratings update, Jefferies wrote of Egan Jones in another pointed jab in today's letter, "we were both shocked and perversely amused when the analyst who first misled the public about our sovereign debt exposure being 77% of our shareholders' equity actually had the temerity to state on widely broadcast television that he omitted the material fact that we had almost equal and offsetting short sovereign debt positions because, and we quote, he had "space constraints." (By the way, that same analyst also points to our 12.9x leverage at the end of August to be too high, but omits here the further material point that we have been operating successfully and profitably with similar leverage for years, including during the 2008-09 financial meltdown."
When asked about Jefferies's Monday letter, Sean Egan said in a phone interview with
that the ratings firm didn't have a response. Of Egan Jones ratings, he said "we are known for our timely, accurate ratings." According to an email obtained by
, Egan Jones will provide a response to Jefferies letter later this week.
With the ratings notices, the TV appearances and Monday's letter, it's clear that a war of words has turned into a battle. At a time of widespread market fear and when many bank shares fall to 2011 lows, the stakes are critically high.
As of Monday trading, the letter seems to have stabilized shares - but they're still over 20% below the levels of $12.27 a share prior to Egan's ratings downgrade. After falling more than 4% in early trading to $9.60, Jefferies erased earlier losses and gained nearly 2% to $10.27 a share in afternoon trading. Meanwhile, the
KBW Bank Index
( BKX) is down over 2% to $36.47.
In its most recent quarter ended in August, Jefferies earned $68.3 million in profits, a slowing on earnings from earlier quarters in the year. About Jefferies's fourth quarter ending in November, Handler wrote that the bank "expect
s to record operating results for our fourth quarter that, although not where we want them to be, will be profitable and stronger than our third quarter." The investment bank has come out of the crisis on track to earn over $200 million in annual profits after posting a 2008 loss of $540 million.
Whether the letter will mirror failed jabs at manipulative shorts during the demise of
, or if it will be seen as a stabilizing blow against Egan Jones's analysis and its reputation is still to be seen.
For second-sized players in Wall Street's high stakes investment banking and securities trading businesses, the battle among lean mean welterweights, now has a heavyweight dimension.
Written by Antoine Gara in New York