A number one Wall Road funding financial institution’s high government claims to have been “defrauded” within the chapter saga surrounding First Manufacturers Group, a collapse that now threatens a series response throughout international credit score markets. On the identical time, legendary shortseller Jim Chanos, famed for his position exposing Enron’s scandal, has drawn ominous parallels between this second and that one, warning this can be one other watershed second for Wall Road.
Jefferies CEO Wealthy Handler informed buyers on Thursday that the financial institution believes it was “defrauded” after being grilled over its publicity to First Manufacturers Group’s chapter, the financial institution disclosed in an SEC submitting. Handler’s feedback adopted an investor letter launched by Jefferies on Sunday, revealing the financial institution’s stake in First Manufacturers debt — initially regarded as as excessive as $715 million — is nearer to $45 million, a determine they declare is absorbable and never threatening to Jefferies’ general monetary well being. Nonetheless, the financial institution’s share value has plunged over 20% for the reason that chapter unfolded final month.
Handler, who mentioned he didn’t see the First Manufacturers chapter as a “canary in the coal mine,” talked about First Manufacturers and the broader enterprise local weather. “I’ll just say this is us personally, we believe we were defrauded, okay, from a company. I personally talk to a lot of investors, a lot of CEOs, a lot of operating businesses. I think the environment is generally pretty darn good.” Handler added he thinks “there’s a fight going on right now between the banks and direct lenders who each want to point fingers at each other and say, ‘It’s your fault, no, it’s your fault.’ The fact of the matter is, the economy is generally good.” He added “it doesn’t feel like we’re on the edge of a default cycle, quite frankly, to me, and I’ve been on the edge of default cycles before” and it doesn’t look to him just like the local weather in 2007, “when the world’s about to come to an end.” The canary within the coal mine, he added, is often the whole monetary sector, and he simply doesn’t see that.
Handler’s assertion comes amid rising public scrutiny. First Manufacturers, a sprawling auto-parts conglomerate, collapsed with over $2 billion reportedly lacking from its accounts and greater than $10 billion owed to collectors, together with a few of Wall Road’s largest corporations.
Of their letter, Handler and Jefferies President Brian Friedman strongly denied incomes undisclosed charges and emphasised the financial institution was by no means conscious of fraudulent exercise at First Manufacturers, stating, “We learned of the fraud allegations when the rest of the public learned.” Relating to the blow to the corporate’s monetary place, they mentioned they imagine the “impact on our equity market value and credit perception … is meaningfully overdone, and we expect this to correct soon as the facts and range of outcomes are better understood.”
Relating to its earlier relationship with First Manufacturers, Jefferies mentioned during the last 10 years, it solely served as a monetary advisor as soon as (for an acquisition), and, whereas it underwrote a $300 million mortgage in 2023, different financings it organized previously decade have been on a best-efforts, not underwritten, foundation. “We are aware of nine other banks being involved in acquisitions or loan arrangements for First Brands.”
Fallout Spreads Throughout Wall Road
The chapter’s shockwaves have unsettled broader monetary markets, with different main lenders like JPMorgan reporting a $170 million charge-off tied to dealership firm Tricolor within the quarter; it had no publicity to First Manufacturers. “My antenna goes up when things like that happen,” JPMorgan CEO Jamie Dimon mentioned of the First Manufacturers chapter. “And I probably shouldn’t say this, but when you see one cockroach, there are probably more. And so we should—everyone should be forewarned on this one.”
A number of investigations into First Manufacturers are underway, together with a reported Justice Division probe into the mechanics of First Manufacturers’ off-balance-sheet financing preparations. First Manufacturers’ CEO and founder, Patrick James, stepped down within the wake of the scandal, changed on an interim foundation by restructuring knowledgeable Charles Moore, whose precedence is to stabilize operations and pursue asset gross sales to salvage residual worth for collectors.
Parallels to the notorious Enron collapse haven’t gone unnoticed. Jim Chanos, the quick vendor who gained worldwide recognition for serving to exponse Enron’s fraud within the early 2000s, is sounding the alarm over First Manufacturers. In talking with the Monetary Occasions, Chanos flagged First Manufacturers’ aggressive use of off-balance-sheet financing — an indicator of Enron’s demise — and warned concerning the harmful position of personal credit score, with extra footwear set to drop on this matter. “I suspect we’re going to see more of these things, like First Brands and others, when the cycle ultimately reverses,” he mentioned, “particularly as private credit has put another layer between the actual lenders and the borrowers.”
Enron’s flawed accounting was additionally partially uncovered by Fortune itself, with Bethany McLean posing a easy query in March 2001: “Is Enron overpriced?”
For this story, Fortune used generative AI to assist with an preliminary draft. An editor verified the accuracy of the knowledge earlier than publishing.
