The Jefferies Delorean

To Our Clients

Given recent headlines and the ongoing global consternation with the financial services industry, we want to share some thoughts of what an investment banking firm could/should look like in the year 2012. This is not to suggest that we have it all right, as we too make mistakes and are hardly devoid of our own issues or challenges. That said, one of us really enjoys (and cannot change the channel whenever he stumbles onto it) a movie starring Michael J. Fox called “Back to the Future.” We believe this concept might be part of the roadmap to cure some of what ails financial services.

We have two primary jobs at Jefferies:

1. We use our ideas, relationships, capital and other resources to help our corporate clients raise capital to grow their businesses. We advise them as they make acquisitions, sell non-core assets, or restructure and revitalize their companies when there are problems. We seek to help our corporate clients generate returns for their shareholders, create more and better jobs for their employees, and maximize their contribution to the global economy.
2. We use our ideas, relationships, capital and other resources to help our investing clients maximize the results for their investors by providing them capital markets deals, research and corporate access, and daily liquidity. Our clients manage assets for individual investors directly and through mutual funds, pension and endowment funds, and, in some cases, through hedge funds. (We also have a few teams at Jefferies that also manage assets for others.)

We at Jefferies are not too big to fail. Should we stumble, Timothy Geithner and Ben Bernanke will not be holding on line two to offer their safety net. Knowing this reality means that every one of the 3,809 of us at Jefferies has the responsibility and obligation to keep our clients, each other, our shareholders and our bondholders out of harm’s way as much as possible. It is a volatile and often treacherous world, so that means we need to have secure long term funding, high quality inventory, an abundance of liquidity and, most of all, a healthy corporate culture. The first rule of this culture is to be devoid of arrogance and wear humility around each of our arms like a badge of honor.

The broker dealer model is not broken. It just doesn’t work when organizations are determined to quickly leapfrog to a place occupied by longstanding competitors regardless of one’s own equity base or team’s capabilities. The fact that firms employed 20, 30 and even 40x leverage to expedite success would have been laughable, if it didn’t have such sad consequences. Illiquid level 3 assets were favored by some firms, because that is where there is less transparency, allowing these firms a greater opportunity to arbitrage their credit rating and capture a larger bid-ask spread from clients. Level 3 securities at Jefferies account for roughly 3% of our global inventory.

We are definitely not easy to manage (what company is?), but we are certainly not too big to manage. You can go through our balance sheet and understand our entire inventory – we are very straightforward. We are large enough to be active in all of the important and relevant aspects of our industry, but small enough to get one’s arms around each of our businesses. The vast majority of what we hold to make markets (90+%) consists of cash instruments that settle regular way. We do not have long dated custom derivatives that are marked to model. We trade bank loans, high grade, high yield, and convertible bonds, as well as mortgage-backed, sovereign and municipal securities. We make markets in preferred, private and common shares. We operate in the Americas, Europe and Asia. We are not so large in any one area that we can control a disproportionately large amount of any product or asset class, so we will not be prevented from moving in and out of our inventory within a reasonable period at realistic prices.

Our company and our employees pay a lot of taxes, are highly philanthropic, and are very proud of what we do on a daily basis. We all try our best to be transparent, nimble, hands-on and determined to do our best for our clients every single day. Our most experienced professionals work daily in the trenches with our clients. We try our best to groom our future leaders to learn the right way to create long value, versus the often norm in our industry of bei ng “short term greedy.”

We earn the right to serve our clients every single day by our actions and our commitment. We also take responsibility for our actions. Our employee-partners, Board of Directors and strategic partners collectively own over 50% of Jefferies. We are aligned with our shareholders and enjoy the rewards together, and feel the pain together. We also know that if our bondholders are not happy and protected, there is nothing for our shareholders to discuss. At the end of the day, it comes down to every one of us at Jefferies doing the absolute best we can every single day for each of you, our clients. This may sound like the investment bank of the past, but quite frankly, we believe it represents the investment bank of the future.

Respectfully,

Rich and Brian