Jefferies Statement on European Sovereign Debt Exposure (JEF -7%, LUK -5%)

Jefferies Group (JEF) is down 7% (was down 20% at one point!) on fears of its european sovereign debt exposure after MF Global went bankrupt. According to Jefferies' press release, they have "long inventory of $2.684 billion" and "offsetting short positions of $2.545 billion as well as offsetting positions in futures instruments" in European sovereign debt. They said its net exposure to Portuguese, Greek, Spanish, Irish and Italian debt was $178 million. See the statement below.

They were downgraded by Egan-Jones yesterday according to Zero Hedge: "Egan Jones Downgrades Jefferies On Concerns About Sovereign Exposure Amounting To 77% Of Equity". If gross exposure doesn't matter in this case, Jefferies went on to say its "combined net short exposure of approximately $38 million equals approximately 1% of Jefferies’ shareholders’ equity, which as previously reported is not meaningful to Jefferies’ shareholder equity." Leucadia (LUK), which owns 27.9% of Jefferies, is down 6%.

"NEW YORK & LONDON--(BUSINESS WIRE)-- In response to information published today, Jefferies clarified information relating to its sovereign-debt positions and its interest-income expense.

To be clear, as of August 31, 2011, Jefferies had no meaningful net exposure to European sovereign debt. Recent reports and calculations appear to have been focusing only on long inventory of $2.684 billion but not taking into account the fact that there were offsetting short positions in such sovereign debt of $2.545 billion as well as offsetting positions in futures instruments. It should be noted that, as of today’s opening of business, Jefferies’ net exposure to the sovereign debt of the nations of Portugal, Italy, Ireland, Greece, and Spain consisted of the following (rounded to the nearest million):

Portugal $5 million

Ireland $28 million

Italy $104 million

Greece $3 million

Spain <$178 million>

That combined net short exposure of approximately $38 million equals approximately 1% of Jefferies’ shareholders’ equity, which as previously reported is not meaningful to Jefferies’ shareholder equity. As Jefferies has previously stated, to the extent Jefferies from time to time takes positions in such debt, they are short term in nature, are recorded in the trading book of Jefferies' regulated UK broker-dealer, are marked to market daily, and fluctuate depending upon customer demand, auction activity, and opportunities in the market place.

With respect to interest-income expense, Jefferies carries interest-earnings investments that turn over rapidly with its funding. As a result, Jefferies has had significant interest income in the past and should continue to have it in the future.

Jefferies Group, Inc. (NYSE:JEF - News) is the global investment banking firm focused on serving clients for nearly 50 years. The firm is a leader in providing insight, expertise and execution to investors, companies and governments, and provides a full range of investment banking, sales, trading, research and strategy across the spectrum of equities, fixed income and commodities, in the U.S., Europe and Asia."

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