Jefferies’ results should have Wall Street quaking

June 21, 2011

By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The latest results from Jefferies should have the rest of Wall Street quaking. The smaller investment bank’s shareholders were spooked by a 17 percent jump in non-compensation expenses since February — and the stock tumbled more than 3 percent before partly recovering mid-morning. But investors in other banks should worry more about the 30 percent fixed-income revenue decline at Jefferies since February.

Such a large fall was a surprise, even allowing for all the chatter about secondary trading slowing down in recent months. Granted, larger rivals may have performed better in products like futures, commodities and foreign exchange. Jefferies will only start dealing in these with greater scale once it completes its acquisition of Bache at the end of the month. But as the first firm to report earnings, it still serves as a useful proxy.

Jefferies does have a structural advantage over larger peers. Its trading unit doesn’t dominate the investment banking operations. So a robust 37 percent increase in fees from M&A advice and raising capital for clients was enough to pick up almost all of the trading slack. And much of that increase came from more than doubling revenue from underwriting debt, a business the firm has expanded rapidly in the past two years. Bulge-bracket institutions don’t have such luxuries.

Take Goldman Sachs, for example, which along with most banks reports earnings next month. Its fixed income traders regularly rake in anything from three to five times more revenue than their investment banking brethren. Applying the shifting fortunes at Jefferies to Goldman’s operations would leave a revenue gap of as much as $2.3 billion compared with the first quarter. JPMorgan, meanwhile, would come up almost $1.5 billion short.

That wouldn’t just dent earnings. After several quarters of lackluster results, it would also lend weight to the argument that the heady days trading enjoyed in 2009 aren’t coming back any time soon. That would in turn increase the pressure on banks to shed staff. Jefferies may not pose an immediate threat to any of Wall Street’s big boys — but it is nevertheless casting a bigger shadow of sorts.

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