Jefferies Jeopardy

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 ...