They seem to be doing everything right and showing that they will do what it takes to keep their customers. They reported their positions over the weekend (I looked at them Saturday). They seemed in line with a “market making” book – at least one that Volcker hadn’t got his hands on. The “gross notionals” in Italy still seemed a bit large, but the net risk seemed reasonable. They had some “trades” on and would profit or lose based on shifts in the curve, but as a whole, nothing seemed too out of the ordinary.
I assumed that a long Italian bond, short Italian bond was relatively self-financing via repos and reverse repos, but with so much volatility in the market, and so many potential counterparty issues, it seemed a bit large, and would have been prudent to trim the position. They have already done that. Another positive step and what you would want your counterparties to do.
You can either rely on too big to fail (with no information you can figure out) or work with someone who may be small enough to fail, but also seems small enough to do the right things.
I am in the process of trying to figure out how “leverage” is calculated for the I-banks. I have to admit, I don’t fully understand it. The Sovereign positions revealed over the weekend seemed relatively low risk to me, and certainly the exposure represented some trades, but that is the sort of thing banks to do make money, and Mr. Handler has shown over the years to be pretty good at it. The position seemed relatively easy to finance, if not self-financing. I read that Egan-Jones was still targeting short dated financing as a potential problem with Jefferies. Is that for books like this or something else? I can only assume it is for something else.
Similarly, they re-iterated their concern about 13.5 times leverage. What actually goes in the numerator? If the Italian position for example, showed up as zero, then what are they leveraged on (and I could see why the Italian position would have added little to the “asset” side of leverage). If on the other hand, the leverage includes the longs from the Italian position, then it is very much over-stated, since the risk is definitely reduced. Trying to find out more, but I don’t see the reason to overly punish JEF relative to other financials.
As Europe continues to struggle to actually deliver on any of their promises (some simple calculations and document reading before making the promises would have helped) I expect pressure to mount on all the banks, but I would look for some of those who “escaped” to get dragged back down.