Grenville

I use to own Davis NY Venture & Selected American (both Davis Funds). See the attached listing of his holdings in April 2008: AIG -1.4bln Merrill - 1bln Wachovia - 400mln Total holdings 45bln He rode those holdings down to very little value. An expensive learning experience for me in my company 401k. Thankfully I found this message board in 08 and 09. DNYVFNQ043008.pdf

Just found this as a good resource to do background research for members of the National Futures Association. They keep track of regulatory proceedings with the CBOT, CME and others. I was lead to this resource as I began reading the CME group's letter to the Senate committee researching MF Global. You can find the regulatory measures against MF Global which they refer to. Also Jefferies was there too. http://www.nfa.futures.org/basicnet/

Zero hedge has the 242 page transcript of the deposition in Fairfax's case on their website here: http://www.zerohedge.com/news/presenting-steve-cohens-complete-unsealed-confidential-deposition-transcript

Based on your quote above, its just like BNSF taking on debt to fund its operation and sending a special dividend up to the parent, Berkshire Hathaway. If the terms of the debt indenture allow it, it is ok. It's like a company paying out a dividend to its shareholders even though it has debt outstanding. A credit facility is another form of debt.

Thanks Greenville, that first one looks very good. Do you mind posting your current thoughts based on your new understanding? Hi racemize, After reading those three books and reading the last two annuals and the most recent 10Q, I feel comfortable with Jefferies. Based on my understanding of their balance sheet they are conservatively financed relative to equity. The have conservative exposures across their inventory positions. Most of their pledged securities are backed by liquid financial instruments so the risk of liquidity is reduced. If you net out all their financing, their financing comes from repurchase agreements and payables to customers. An increase in the payables to customers is a result of their recent commodities acquisition of Prudential Bache. Also their derivative positions and book is growing but a large percentage of the portfolio is exchange traded versus OTC. I also like the fact that their CDS on the liability size is related to index positions versus individual names. With financial institutions you have the black box risk. In terms of Jefferies I feel comfortable with this risk knowing that Leucadia has two board members and have known Handler since at least 2000. Handler also owns a decent slug of equity. I also like that Jefferies has raised capital at decent equity prices and interest rates this year before the markets went haywire. The other thing I like is that when push came to shove they have been very transparent about their sovereign exposure and you got the long letter from Handler. In terms of valuation, the company is trading below tangible book with a conservative estimate of shares outstanding (include RSUs and convertible prefs). Right now the company is making about 200mln a year in a muted environment. In addition, they are hiring aggressively in investment banking and building out the franchise across the world. The willingness to hire and take on the additional expense when things are tough shows me a capacity to suffer and an eye towards long term value creation. It's a good company and I believe a good investment, but you really need to understand the balance sheet and their model. In these volatile times with MF global and all the rumors from certain websites, the share price seems to be pretty volatile. I'm long JEF stock (~5%) and the bonds (~2%).

In my research of Jefferies, I needed to find good references to understand the mechanics of securities lending & repurchase agreements. In addition, I wanted to make sure I understood the implications accounting wise on the balance sheet. Here are three books that I came across that were very helpful in my understanding of securities finance. The first book was by far the best reference. The Repo Handbook by Moorad Choudhry (2nd Ed. 2010) http://www.amazon.com/Handbook-Securities-Institute-Capital-Markets/dp/0750681594 Securities Finance editors Frank Fabozzi and Steven Mann (2005) http://www.amazon.com/Securities-Finance-Lending-Repurchase-Agreements/dp/0471678910/ref=sr_1_1?s=books&ie=UTF8&qid=1323641789&sr=1-1 Audit and Accounting Guide: Brokers & Dealers in Securities by AICPA (2010) http://www.amazon.com/Brokers-Dealers-Securities-AICPA-Accounting/dp/B004HZLXEG/ref=sr_1_3?s=books&ie=UTF8&qid=1323641955&sr=1-3

Here is a good thread on Derivative exposure at the big banks:

Here is the subsidiaries website: Fairbridge Capital (India) http://www.fairbridgecapital.com/index.html

The hedges do offset their equity positions, but their bond portfolio is high quality (govt, munis (CA), and Berk backed munis) and long term. On top of that you have the huge notional portfolio of deflationary CPI bets that will do well in a depression type environment.

I appreciate both your's and Link's comments. I'm adding to my position and it's nice to see other's having a similar read on the letter. I don't want to be overly optimistic, but at the same time the downside seems reasonable. The bonds are still trading at attractive yields.

Good letter from Handler laying out what sounds to be a short attack and Jefferies responses. It looks like they are doing what is required to build long term value. They are buying back debt and stock.

you make some very good points here. however, in this environment those hedges are fraught with more than normal risk, no matter how well structured & tested for historical asset/spread relationships. investors need more than ever to have their eyes WIDE open. jef is still a leveraged business, after all, dependant on the markets for its funding & exposed to counterparty risks etc. FTalpha really has some insightful articles about some of the risks: http://ftalphaville.ft.com/blog/2011/11/04/726571/the-jefferies-issue/ http://ftalphaville.ft.com/blog/2011/11/03/725391/jefferies-we-have-to-explain-this-again/ http://ftalphaville.ft.com/blog/2011/11/07/730881/jefferies-2bn-toldjaso/ http://ftalphaville.ft.com/blog/2011/11/04/728711/jefferies-for-the-love-of-a-greek-god-how-many-times-must-we-explain-this/#comments but perhaps the biggest unknown, unquantifiable risk comes courtesy of zerohedge (useful for its news aggregating abilities tho its extreme anarchist slant on that news needs to be hugely discounted). anyways, it seems jef & its bigger brother ibanks are being sued for fraud for underwriting & peddling MF Global bonds right before they went poof: http://www.zerohedge.com/news/final-straw-jefferies-and-six-other-banks-sued-fraudulent-mf-global-bond-issuance personally, i think INTL is the best managed ibank by far, with JEF being a distant 2nd, tho i wont get interested in it again until 16 or so Thanks for all the linked articles. I agree that times must be much tougher when sizing up counter parties. According to the filings JEF isn't taking large gross exposures via CDS and netting them out neatly like a lot of the major commercial banks. A large percentage of their derivative exposure is through central clearing houses. Also their ability to reduce their sovereign exposure in a stressed market is telling about the structure of their hedges. In terms of liquidity: 1. JEF has raised equity and debt in a prudent manner, maturities are spread out a. 4.2bln of debt b. 3.5bln of stockholder's equity 2. They have financial instruments that can be pledged as collateral 3. Cash & uncommitted lines of credit a. 2bln of cash b. 1.7bln of bank lines unused They do not have the ultimate backstop with the FED as a bank holding company, but they also don't have the regulation risk that comes with it. In terms of the MF Global Bonds, that doesn't come across very well if you tout working in the best interest of both clients and customers. Some of the fraud and the using of customer funds couldn't have been known by JEF so I find it hard to see them at risk for that. In terms of ultimate exposure, it depends on how long the litigation last and the ultimate outcome which could be years in the future when hopefully normal markets return. Lastly, there is risk of the unknown since we only get a glimpse of what's going on in the black box when you see the financial filings. It really is a bet on the management and on their track record. The one thing that gives me confidence is that the Leucadia guys have worked with Handler for a long time both on the board since 2008 and through the High Yield platform (since 2000) that is run by Handler. I'm also aware that Leucadia hasn't always sized up their partners given what happened at Fortescue and the litigation there but sometimes its a matter of time before true intentions appear. I haven't looked at INTL, but LUK owns shares.

couple of things makes jef's risk standout vs the other majors ibanks: they arent a bank holding co , & they're not TBTF (too big to fail). so there's more uncertaintly/vulnerability from that side of things. also, while they cut their euro sovereign debt in half, its the other remaining half that the market is worried & skeptical about. plus, in highly stressed global market the new watchword for net HEDGED exposure has become: gross is the new NET! fear has undermined trust. from naked capitalism: 1. Can the institution with CDS exposure afford to collateralize all of their exposures? This was a big factor in why MF Global moved so quickly to bankruptcy – as MF and their exposures got downgraded, MF ran out of available assets to post against their CDS. This is probably why they violated their segregated accounts. This is also what drove AIG to needing a bailout – they lacked sufficient funds to post against their very large exposures. Thus, the problem is not the mechanics of CDS and collateralization, but the fact there is no real limit on how much exposure an institution can take on in CDS relative to assets available for collateral posting. 2. What is the credit worthiness of the various counterparties? Gross exposure may be netted down via CDS hedges, but what if the counterparties run into an MF Global or AIG situation? If a counterparty is unable to honor its hedge (either through collateral posting or outright), then the value of the hedge is greatly diminished and more likely to yield something like ten cents on the dollar (a typical ISDA auction level for unsecured CDS debt). This is the issue that ZeroHedge has been harping on with Morgan Stanley and Jeffries – i.e. “gross is the new net”. Since the various gross exposures to various European sovereigns is quite large, a legitimate question can be asked about how secure these hedges (and the resulting netting) will be in the event of significant country or institution downgrades. >> http://www.nakedcapitalism.com/2011/11/on-the-dubious-defenses-of-the-netting-of-4-trillion-of-us-bank-cds-to-the-eurozone.html http://ftalphaville.ft.com/blog/2011/10/27/713826/how-gross-and-net-cds-notionals-really-work/ I would encourage anyone interested in JEF to look at their disclosure for derivatives. According to the Q3 10Q, their CDS exposure is to Indexes. Also a large % of their derivatives are exchange traded versus OTC based on fair value data estimating. They seem to run a clean ship based on their ability to lower their exposure to sovereigns as shown last week. You also have LUK owning 29% of the equity at Jefferies and 50% of JEF high yield platform. Then you have Handler & Friedman who own 8.3% of the equity as well.

Nice commentary on Jefferies on Bloomberg. Recent quotes from Handler and Friedman. http://www.bloomberg.com/news/2011-11-17/jefferies-ceo-sees-turmoil-easing-as-mf-global-comparison-fades.html

Here is the SEC data. Just the US reportable holdings and I think he still holds FFH. http://www.sec.gov/Archives/edgar/data/1173334/000119312511310619/d256116d13fhr.txt

It's also interesting to see additional TRS that look to be short positions against the following: BHP Billiton 70mil at 95 (5/11/11) Freeport 62.8mil at 55.9 (5/11/11) Rio Tinto 63mil at 74.7 (5/11/11)

According to the ORH Q3 NAIC filing there are two TRS wrt RIMM 40mil notional at 28.3749 (7/11/11) 40mil notional at 27.286 (7/15/11)

Hi MrB, Did Fairfax buy puts? Is the Sino-Forest investment disclosed in any filings?

Zenith is now offering agriculture related insurance. I found this out when another article posted below mentioned the quick start of the business from the IT side. If anyone finds any additional articles about the new line, please post! How I found out about it: http://www.insurancenetworking.com/news/Celent_zenith_Johnson_agribusiness_insurance-29296-1.html "While the initial plan was for the company to begin writing business January 2012, in September 2010, The Zenith’s parent company, Fairfax Financial Holdings Limited, insisted on January 2011 start date. Johnson and his small team had to move quickly." Old article about the new line of business: http://www.insurancejournal.com/news/west/2011/03/30/192346.htm Link to Zenith's Agribusiness page http://www.thezenith.com/zas/gettingstarted/page45484.html

I spent the weekend reading the 10-K, was hoping someone here could shed light on who the European bank is that supports the commodity business. Here's the info from the K: p.121 of the 2010 10-K "JFP maintains a credit intermediation facility with a highly rated European bank (the "Bank"), which allows JFP customers that require a counterparty with a high credit rating for commodity index transactions to transact with the Bank. The Bank simultaneously enters into offsetting transactions with JFP and receive fees from JFP for providing credit support."

Thanks!

Hi Valuegeek, Is there a transcript of the LUK AGM or audio recording? The insight on the JEF investment is much appreciated.

Great stuff. I particularly enjoyed the "capacity to suffer" concept. A very valuable trait to find and important one shared by some of the great investors. Very important in the insurance business as well!

I agree with you completely. It's hard to get comfortable with the CDS exposure and I sometimes wonder why the banks put themselves in the middle of the chain if they are just going to buy an identical policy from someone else. Why not let their customers buy the contract directly from the derivative dealer, that way their balance sheet isn't at risk if a credit event happens or the credit dealer disappears. One might argue these customers are too small to purchase CDS from a dealer. My rebuttal would be that I wish these contracts were written such that the banks just served as brokers, aggregating business for the dealers. oh well....

I've only looked at WFC derivative disclosure in their financials: I haven't seen specific disclosure regarding country exposure on sold CDS or what type of CDS they are selling at WFC. They buy identical contracts from others to "transfer" their CDS risk. The article will play to the current fear because banks don't have a ton of disclosure on the CDS contracts with respect to lines of business or counter parties similar to what insurance companies show in regards to reinsurance.