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i Children v Tag ssearchmen Children Violence ankin Violence r Violence venue, and a 74% increase in interest revenues. Jefferies, along with many of its peers, benefited from a strong stock market and an active M&A market.
Over the past few years, the firm has substantially diversified its revenue base. In 2000, over 75% of the firm’s revenue came from its Sales and Trading operations, but by 2006, revenue from Sales and Trading operations dropped to about half of the firm’s revenue, with a substantial growth in financial advisory and other areas of the firm.
Jefferies is highly impacted by both global and US economic conditions. During periods of rapid economic growth, companies typically pursue more mergers and acquisitions, leading to greater demand for Jefferies’ Mergers and Acquisitions advisory services. Also, the stock markets typically move in the same direction as the overall economy. If the market is up, then the demand and performance of Jefferies' sales and trading operations, as well as its asset management services will likely increase. Conversely, if the economy is depressed, demand for the firm's Mergers and Acquisitions advisory services can decrease substantially and the value or performance of the sales and trading division and the assets in the asset management business could also be affected adversely.
Jefferies' CEO Richard Handler is crucial to the performance of the company. He has been at Jefferies for over 16 years. Apart from running the firm, he also actively manages three investment funds for Jefferies. This poses the question if the CEO is stretched too thin and has enough time to focus on the key issues facing the firm.
Subprime lending refers to the practice of extending credit or loans to borrowers who fail qualify for prime or market rates due to their less than optimal credit scores. For the past decade, the interest rates associated with subprime mortgages have been about 2% higher than those associated with prime loans; the rationale is that borrowers with lower credit scores carry a higher risk of default and must therefore pay a considerable risk premium. Subprime borrowers can be extremely sensitive to interest rates. As rates rise, these borrowers, many of whom have adjustable-rate mortgages, find themselves unable to meet their debt obligations.
Jefferies is affected by the impact that worries about subprime lending are having on the overall market. In particular, the subprime fallout has scared banks, who are afraid that it is symptomatic of a broader deterioration in credit quality. As a result, lending standards have been raised in the second half of 2007 than it has been in previous years, causing the funding of M&A transactions to be more challenging - this can have an adverse effect on Jefferies' advisory business. Additionally, Jefferies has exposure to junk bond and collateralized loan obligation (CLO) markets, which were disrupted by the subprime problems. On top of this, as many financial services firms have reported losses regarding subprime mortgages, the overall equity markets have been depressed, which may have an adverse effect on the firm's sales and trading and asset management business.
Jefferies faces strong competition from many investment banks. On the advisory side of the firm, it competes with other leading middle-market investment banks, including Houlihan Lokey Howard & Zukin, William Blair & Co, Thomas Weisel Partners, and others. On many transactions, it also competes against larger investment banks,with substantially greater capital and resources,such as: