Jefferies closed its annus horribilis on a wicked downer. The Wall Street securities firm lost $93 million in its fiscal fourth quarter as revenue slumped by 43 percent. For much of the period, the firm was in the news because of the very public proceedings of senior banker Sage Kelly’s divorce. Boss Richard Handler says the financial impact of Kelly-gate was “immaterial” to the bottom line.
A bum acquisition accounted for a large chunk of the loss. Back in 2011 Jefferies bought Bache, a commodity and futures brokerage, to beef up its trading operations. That has not panned out well. Both business lines have struggled in recent years, suffering from what Handler admits are “growth and margin challenges.”
In the three months ending in November the unit contributed $44 million to Jefferies’ top line. That’s just 8 percent of the quarter’s overall revenue. Jefferies is now deciding what to do with Bache and has taken a $60 million charge against its value.
The firm’s fixed-income traders had a poor quarter, too. The top line shrank 73 percent, much of it stemming from mark-to-market losses on distressed assets the bank keeps on its books. The firm also wrote off $52 million in bad debt stemming from the sudden bankruptcy last month of Danish ship fuel supplier OW Bunker.
Meanwhile, investment-banking revenue slipped by a quarter. Handler insisted this was all about an industry-wide slowdown in deals. There were fears that clients would pull business after a host of allegations leveled at healthcare M&A chief Kelly by his wife in court proceedings.
These included rampant abuse of alcohol and illegal drugs, frequenting prostitutes and defecating and urinating in the bedroom. Handler, along with bankers mentioned in the court filings, took the unusual step of taking drug tests in October to deflect claims of drug use. In November Christina Kelly said that “a substantial portion” of what appeared in the press was “inaccurate, untrue or hyperbolic.”
There may still be some fallout from the affair. Corporate finance mandates and their associated fees can take months to appear – or disappear. For now, though, the firm insists it is business as usual that is doling out the financial pain.
On the trading front, Jefferies in good company: Citi, Bank of America and JPMorgan all recently warned of a slowdown. But these Wall Street behemoths are unlikely to suffer the same cocktail of toxic ingredients as Jefferies this quarter.