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Executives

Rich Handler – Chairman and CEO

Peregrine Broadbent – EVP and CFO

Brian Friedman – Chairman, Executive Committee

Analysts

Meredith Whitney – Meredith Whitney Advisors

Chris Kotowski – Oppenheimer

Douglas Sipkin – Ticonderoga

Michael Wong - Morningstar

Jeff Harte - Sandler O'Neil

Steve Stelmach - FBR Capital Markets

Daniel Harris - Goldman Sachs

Patrick Davitt – Bank of America/Merrill Lynch

Richard Bove - Rochdale Securities

Joel Jeffrey - KBW

Jefferies (JEF) F4Q10 Earnings Call December 20, 2010 9:00 AM ET

Operator

Welcome to the Jefferies fiscal 2010 year-end financial results conference call. [Operator Instructions.] As a reminder, this conference call is being recorded. A press release containing Jefferies 11-month fiscal 2010 financial results was distributed via Business Wire earlier this morning and can be accessed at Jefferies website at www.jefferies.com.

Some of the comments made in this conference call may include forward-looking statements. These forward-looking statements may contain statements about management’s current assumptions, expectations, strategic objectives, growth opportunities, business and prospects. These forward-looking statements are not statements of historical fact and represent only Jefferies' belief as to future performance. They usually include the words “continue,” “will,” “believe,” “should,” “estimate,” or other similar expressions.

Actual results could differ materially from those projected in these forward-looking statements. Please refer to Jefferies annual report on Form 10-K filed with the Securities and Exchange Commission on February 26th 2010, and in Jefferies Form 10-Qs and 8-Ks for a discussion of important factors that could cause actual results to differ materially from those projected in these forward-looking statements.

I would now like to introduce your host for today’s call, Mr. Richard Handler, Chairman and CEO of Jefferies. Mr. Handler, you may begin your conference.

Rich Handler

Good morning and thank you for joining Jefferies' 2010 fiscal fourth quarter and year-end preliminary results discussion. I am Rich Handler, CEO of Jefferies, and with me on the call today are Brian Friedman, chairman of our executive committee, and Peg Broadbent, our chief financial officer.

For the fourth quarter ended November 30, 2010, Jefferies posted net revenues of $695 million, net income to common shareholders of $71 million, and earnings per share of $0.35. Our preliminary fourth quarter results were driven by record quarterly investment banking revenues and a solid performance by our trading lines. We are pleased with the quality and breadth of our quarterly results, and we are experiencing strong momentum throughout our firm as we begin our 2011 fiscal year.

For the 11 months ended November 30, 2010, we were pleased to achieve record fiscal net revenues of over $2.2 billion. The previous full year record was $2.17 billion for the 12-month 2009 fiscal year. 2010 net income to common shareholders was $236 million, with earnings per common share of $1.15.

If we were to annualize our 2010 11-month results, Jefferies would have had $2.4 billion of total revenue, $257 million of net income, total trading revenues of $1.4 billion, and total banking revenues of $971 million.

Our preliminary results should be considered against a year that was often volatile but sometimes quiet, in which we invested heavily across our firm and recruited significant additional high-quality human capital.

Peg will take you through further details of our preliminary results in a moment. During the last six months of fiscal 2010, we have actively increased our long-term capital base by over $1 billion in aggregate, or nearly 18%, to just over $7 billion. In keeping with our philosophy of building long-term capital when the markets are attractive, but when we had no urgent need to use the capital.

Included in this over $1 billion is the $500 million in 3 7/8 five-year notes we issued in November, aimed primarily at increasing our corporate liquidity buffer to support the continued expansion of our sales and trading platform. Our cash balance was about $2.2 billion at November 30, with zero bank debt drawn. The weighted average life of our long-term debt is over 10 years.

As has been our practice forever, we do our best to deploy our capital cautiously and prudently for the long-term expansion of our firm. You have heard consistently from us about our focus on building and integrating one great Wall Street firm that is a clear leader in serving both issuers and investors in the global capital markets.

Our 2010 fiscal year results reaffirm that we are making solid progress, with net revenues and strong net income, despite a substantial investment for the future that was expensed in 2010. Our firm-wide priorities remain to devote our human and financial capital to add value and best serve our increasing client base; to attract and retain outstanding talented professionals who want a career serving clients and partnering to build a great firm; to operate our capital markets, sales and trading, research, investment banking, and asset management efforts in the most client-focused, integrated, and efficient manner possible; to extend our full-service reach broadly but profitably across the globe; to maintain the fair and proper balance between the interests of our employee partners and those of our shareholders; and to be recognized as one of the best full-service integrated global securities and investment banking firms.

In 2012, our firm will be 50 years old. We believe great firms are built one client at a time, one trade or deal at a time, and one talented employee partner at a time. Building a great firm takes enormous and relentless effort, passion, humility, and commitment.

We believe that the 3,084 people at Jefferies today have what it takes and we are all on our way toward our goal. We enter 2011 with optimism, momentum, and great expectations. Now I'll turn it over to Peg.

Peregrine Broadbent

Thank you Rich. As Rich mentioned, our preliminary results reflect net revenues for the quarter of $695 million, and for the 11 months ended November 30, a record $2.2 billion. Net income to common shareholders for the fourth quarter was $71 million, or $0.35 per share.

Now for the details on our preliminary results. Fixed income revenues were $252 million, up 47% from the third quarter of 2010, and up 13% from the comparable quarter a year ago. Please note that due to strong quarterly performance in our Jefferies high-yield trading secondary trading platform, which we only partially own, in aggregate $29 million is attributed to our minority interest partners. This compares to negative $5 million last quarter.

Equities net revenues of $146 million were 43% higher than the third quarter, and 36% higher than the fourth quarter of 2009. Investment banking revenues were a quarterly record of $292 million, 19% higher than our then-record third quarter and 51% higher than the fourth quarter of 2009. Asset management revenues were $5 million, compared to $1 million for the third quarter of 2010.

Non-compensation expenses were $135 million, essentially flat with the last several quarters. Our compensation expense ratio was 58.7% for the quarter. The compensation rate for the full fiscal year was 58%, the same as the ratio for the first 8 months of the fiscal year. Our compensation expense includes significant investments we have made in our support groups, and the building out of our investment banking, trading, and research as well as the beginning of our significant expansion of operations in Asia.

Our tax rate for the fourth quarter was a more normal 37.7% versus 44.3% last quarter, and 39.5% for the full fiscal year 2010. As we explained three months ago, our tax rate for any given quarter is derived from our then-current estimate of total pre-tax profits for the full current year, and the expected mix of those profits by business and tax jurisdiction.

Given the weaker trading environment of the third quarter, and consequentially weaker performance of some of our trading businesses, we had then updated our pre-tax profit forecast for the full fiscal year based upon the facts and our expectations at that time. This resulted in the unusually high tax rate for the third quarter.

During the quarter, we repurchased 1.1 million shares at an average price of $23.27 per share. We estimate our total assets as of November 30 were $35.2 billion, which included about $2.2 billion of cash in the bank, with our average total assets during the quarter about 11% higher. The increase in assets versus August 31 is almost entirely attributable to an increase in highly liquid and price transparent assets on our balance sheet, primarily in U.S. and other sovereign securities, as we continue to drive our fixed income rates globally.

We estimate our level three assets, after adjusting for non-economic interests, were $255 million, 2% of total assets at fair value, an over $100 million, or 31% decrease compared to August 31, due to sales of certain distressed equity, corporate debt, and residential mortgage-backed securities during this period. These sales did not have a material impact on our operating results for the fourth quarter.

We estimate our average VAR for the quarter was approximately $6.5 million, lower than the $8.6 million reported last quarter. The decrease reflects the fourth quarter's generally lower levels of volatility, as well as a greater diversification benefit and lower levels of correlations across markets.

We ended fiscal 2010 with a total of 3,084 employees, a net increase of 113 from the end of the third quarter and 456 from the beginning of the year. This increase reflects the continued rounding out of our global sales and trading and research platform, the staff required to support it, as well as growth in our investment banking team.

As we stated in our press release, the results we are reporting today are preliminary. During the fourth quarter we began self-clearing another portion of our fixed income business and collecting final proceeds from the clearing bank that cleared these types of trades for us for the past five years. As we completed that transition, and as positions and cash balances wound down, the bank delivered a statement of account that differs from our records by $39 million in favor of the bank.

Before finalizing our results, we are attempting to reconcile the current difference with the bank. Were it to be determined that the bank's statement is fully correct, and were the entire difference to be charged against the 11 months ended November 30, 2010, earnings per share for 2010 may be reduced by $0.07 from $1.15 to $1.08, although this amount might ultimately be required to be allocated to prior periods.

This possible earnings reduction for 2010 takes into account the impact of offsetting expenses and taxes. If it were to be determined that the bank statement were to be full correct, Jefferies' adjusted book value per share at year end, based on 200 million shares outstanding, including restricted stock units, would be reduced by $0.08, or about 1/2 of 1%, from $13.28 per share to $13.20 share, and would therefore have no meaningful impact on the firm's equity capital base. No other such differences currently exist between Jefferies' records and any statements received from this clearing bank or other clearing banks that still clear securities on our behalf.

Brian will now address in more detail our investment banking results.

Brian Friedman

Thanks Peg. As Peg indicated, our investment banking revenues were a quarterly record of $292 million, a substantial increase from the $194 million generated in the comparable period a year ago. The quarter's results brought our total investment banking revenues for the 11 months to $890 million. This is well in excess of the previous 12-month fiscal year record of $750 million, in 2007.

Our M&A and advisory revenues were $157 million in the fourth quarter, 5% up on our strong third quarter and 77% higher than the fourth quarter of 2009. Our fourth quarter M&A and advisory revenues were generated from a broad range of clients and transactions.

Our capital markets revenues in the fourth quarter of $139 million are 28% higher than the year-ago quarter and 40% higher than the level realized in the third quarter of 2010. Debt capital markets generated $89 million, and equity capital markets $46 million, reflecting a slight improvement in both IPO and secondary equity activity. Going into fiscal 2011, our capital markets backlog is strong.

If one annualized our 11-month investment banking revenues, the total revenues would approach $1 billion. Our record investment banking results in 2010 and the momentum we carry into 2011 reflect an improving environment, but also an increasingly stronger market position for Jeffries. We are benefitting from an enhanced team of leaders and professionals, the integration of our broad product capability, and an improved competitive position supported by increased brand awareness.

Looking at our momentum by product and comparing the 11 months of fiscal 2010 to the 2009 12-month period, in equity our number of book-run offerings increased by 63% in 2010 to almost 60 offerings, and we are now book-running 82% of our offerings. As book-runner, we raised approximately $7 billion of equity for our corporate clients in the 11 months of 2010, up almost 100% from the full year of 2009.

In leveraged finance, our book-run bond and loan offerings almost doubled from 39 offerings in 2009 to 76 offerings in 2010, and we are now book-running 82% of our leveraged finance deals. We raised as book-runner $24 billion of bank and bond financing for our clients in fiscal 2010, compared to $9 billion in calendar 2009.

In advisory, we announced 126 merger, acquisition, and restructuring transactions in 2010, up 45% from 2009. Our average M&A transaction increased in size by over 130% to $540 million in 2010, due in part to our success in advising on 13 transactions in excess of $1 billion.

Clearly from these results, we have strong momentum across all our products. What is equally exciting are the new managing directors and the new sectors that we have recently put in place and we expect will incrementally drive our business in 2011.

In terms of our new MDs, of the 127 MDs that we now have in investment banking and capital markets, or are soon to join us, 34 of these MDs have been at Jefferies less than 6 months or are in the process of joining us. Put differently, our strong investment banking results in fiscal 2010 do not reflect the revenue potential of this 27% increase to our investment banker coverage efforts that has hit the field, or is about to.

In terms of new sectors, the story is equally exciting. In the last 6 months and the next 3 months, we have entered, or will enter, major new industry sectors that previously we had no presence in. These include banks in the United States, business services in the U.S., automotive in the U.S., metals and mining globally, telecommunications in Europe, consumer and retail in Europe, real estate and lodging in the U.S. and Europe, and chemicals in the U.S. and Europe.

Our 2011 plans in investment banking include the continued build out of our client coverage efforts, further enhancing our talent domestically and particularly in Europe. Combining our global expansion aspirations with most importantly a growing pipeline for 2011 means that we are excited about the prospects for our investment banking business as we enter our new fiscal year.

Although we enter 2011 with a significantly more diversified and robust platform in terms of industry verticals, products, and geography, we want to remind everyone that investment banking revenues can and will be lumpy, and our market- and economy-dependent.

Now Rich will comment on our trading result before we take questions.

Rich Handler

Thanks Brian. Our trading activity levels and our market share improved across the platform in September, October, and November. Our fourth quarter sales and trading net revenues were $398 million, an increase of 46% over the third quarter, reflecting the improvement in the environment and volumes for both our fixed income and equity lines.

We believe our results also reflect market share gains across all of our improved trading platforms. Despite the periods of market volatility and significant slowdown during 2010, we completed a very solid 11-month period recording over $1.3 billion of sales and trading net revenues.

We expect our sales and trading businesses to show continued improvement in 2011. To this end, we have recently completed a number of management additions and promotions and we continue to drive efforts to better integrate and cross-sell our capabilities. We have also made material investments in personnel, technology, and support throughout our trading businesses.

As we mentioned before, we are building an Asian equity, sales, and trading operation headquartered in Hong Kong. Our enlarged Hong Kong office opened for business on schedule in the middle of November, and is adding new customers daily. At November 30, 2010, we had nearly 40 sales, trading, and research professionals based in Hong Kong, and over 80 Jefferies employees working throughout Asia.

It takes endless effort and time to build a great firm. Soon, Jefferies will be 50 years young, and our 3,084 employee partners know that because of their hard work and dedication, we are poised for a truly exciting future. Our balance sheet and liquidity have never been stronger, our firm has never been more diversified or integrated, our competitive position has never been stronger, and our strategic direction has never been clearer. Our clients are telling us through their actions that we are a more important partner than ever for them as they strive to build their respective businesses.

The bottom line is that it is really good to be Jefferies today. I speak for every one of my 3,083 partners when I say we all appreciate the responsibility and opportunity that comes with being part of Jefferies in 2011. Thank you, and we're now available for questions.

Question-and-Answer Session

Operator

[Operator Instructions.] Your first question comes from the line of Meredith Whitney with Meredith Whitney Advisors.

Meredith Whitney – Meredith Whitney Advisors

I appreciate your high-level overview. I just wanted to get some more on-the-ground plans for '11 in terms of hiring, expansion. You'd alluded to the fact that you expect some operating leverage coming from the hires you've already made, but what additional teams do you need to build upon? That's my first question. My second question is the age-old question, what do you see as the continued challenges of being a relatively smaller firm going into '11 and '12?

Brian Friedman

Couple of questions obviously embedded there. I think on where our additions will be on the professional side, clearly we're going to keep building out our investment banking sector coverage. That's very high leverage for us because we already have the distribution capability and a fair amount of the capital markets capability.

So it's really to a degree putting sales on the street. So building out the sectors in the U.S., in Europe. And as we go into 2011 you'll also see us starting to hire investment bankers in Asia and a little bit in Latin America.

Secondly, as we've said, we're going to build out the equities platform in Hong Kong and Tokyo initially and on the back of that in 2011 we'll also be building out in India. So those will be focus areas for us. Finally, we're continuing to hire, particularly on the credit side in Europe, as we build out that platform.

As far as being a smaller firm, I don't know that we think of ourselves that way. I think we think of ourselves as being a focused firm, and in the businesses that we operate, we feel that we have competitive scale and we are getting success as seen in the results. I think we don't see great disadvantage from size. There's a little bit less leverage on overhead than you might see at a much-larger organization. On the other hand, we're able to benefit from some of the ability to move a little faster and a little more focused. And in the businesses we choose to compete in, we think we're fully competitive.

Rich Handler

I would just add to that. Being a firm our size you do have to balance your growth with your intermediate-term results. So it is more of a fine-tuning as you see the markets and the environment, constantly trying to build for the long-term, but being cognizant of having reasonable results on a quarterly basis. Another thing is we're obviously building our brand, and that's always a challenge relative to the larger players with their household names. That's an ongoing process. I think finally, being a slightly smaller firm we probably keep a relatively large liquidity buffer, just because we want to be more prudent.

Operator

Your next question comes from the line of Chris Kotowski with Oppenheimer

Chris Kotowski – Oppenheimer

Couple things. First of all, this discrepancy from the clearing bank. I've never come across this one before. Can you give a little color on how it occurred and over what kind of period this had built up? And is this a risk that one should think about in general happening in this industry?

Peregrine Broadbent

It's not untypical to have differences with respect to ourselves and our clearing bank, and as I indicated, we have had a few differences between ourselves and our clearing bank with respect to this particular product type. In terms of the risk, the risk really no longer exists because we're now self-clearing and so with respect to this particular activity, it's somewhat of a moot point going forward. As I also indicated with respect to other activities, where third parties are still clearing some of our business lines, there are no such differences. We don't know exactly how this is going to be resolved, but I stated what the worst-case scenario could be and we'll figure it out before the 10-K is released I hope.

Chris Kotowski – Oppenheimer

Okay. And then if I think about - there's always kind of an inverse relationship between comp ratios and the capital intensity of a business, and I guess I'd say compared to the other big investment banks you've always run a business that's probably less capital-intensive but has higher comp ratios. So yours was 58, the Goldmans and Morgan Stanleys of the world are in the 40s.

Brian Friedman

Morgan Stanley's at 40 right now?

Chris Kotowski – Oppenheimer

Well, if you add back all the other - [Laughter] - but where do you kind of see, in a world where you don't have all these investments all the time, and the build outs that you had, where would you see the right level of compensation for the amount of capital intensity that's in your business?

Rich Handler

I think what you're seeing in our organization with the diversification and the capital base, we would like to drive our comp ratio to the mid to low 50s and we think that's a reasonable number. And at that point, we'll reassess in terms of how to get even more operating leverage out. By the same token, when you are in growth mode as we are, you do have to keep making these investments and there's a lag time between the returns and the actual costs. So that's a good rule of thumb, although we gave people guidance somewhere in the mid to slightly high 50s for this year. I think that's probably a good number to use until we get more operating leverage.

Brian Friedman

And you have to recognize that we're in a period of opportunity. The crisis created enormous opportunity for us, and that hasn't necessarily stopped. There's still a reshaping of the landscape taking place, and we need to take advantage of that. We'd be making a mistake if we didn't.

Chris Kotowski – Oppenheimer

Yeah, and as a followup to that, I guess last quarter you highlighted the opportunities in Europe, and I guess I'd be kind of curious as to your take on the level of stress there, and how that is affecting your business both positively and negatively. On the negative side I could imagine it pushing out investment banking and backlog and investors being more risk-averse. On the other hand, I imagine it makes it easier to hire?

Brian Friedman

It's definitely been, for a lot of reasons, a good time for us to be hiring, in Europe as well as frankly everywhere. But in Europe we've had some incredibly talented people available to us and we're pleased to be bringing them aboard. As far as the crisis over there on the government side, I would say that number one, our European rates team has actually done a good job this year of navigating. It was the first full year for that business to be in operation and they got handed probably the toughest hand ever in the history of that business and they did a very good job. Secondly, to some degree with euro rates under pressure people did look at other asset classes and it was a slow year but not a bad year overall.

Rich Handler

I'd just add that considering we made a major investment only a short two years ago in Europe, and it takes a while to get your brand established, we've gone from introducing people to who Jefferies is over there on the training side being a top 10 to top 15 in a variety of businesses, and on the banking side, as Brian mentioned, we've brought in some really high quality people who are helping to elevate our stature over there. So it's a work in process, but we have a good foundation.

Operator

Your next question comes from the line of Douglas Sipkin with Ticonderoga.

Douglas Sipkin – Ticonderoga

Just a couple of followups. First, can you just talk about the strength in fixed income trading? Maybe what products? I think you guys alluded a little bit to high yield. And then maybe talk a little bit about month to month, how it progressed?

Brian Friedman

I think the strong areas in fixed income this quarter were both high-yield and the mortgage area for us. I think if you look at our quarter on balance it was pretty much balanced. All three months were relatively decent.

Douglas Sipkin – Ticonderoga

Okay. That's helpful. And then maybe a question for Peg. I thought maybe you guys were thinking a little bit more about moving away from buybacks to continue to grow capital to support the growth of the fixed income business. And then I saw you guys did repurchase a decent amount this quarter. Any update on what the plans are, if there is any change to the buyback philosophy into 2011?

Rich Handler

Keep in mind we did issue a fair amount of year-end compensation, number one, in the form of stock, so our buyback might not appear as large in regard to that base. We are trying to lock the balance between avoiding dilution, having enough long-term capital, and making sure that - which was buttressed by the fact that we raised $500 million of financing during the quarter - so there's no science to it. It's more of an art. We're trying to minimize dilution, keep our capital base, and I can't be any more specific than that.

Douglas Sipkin – Ticonderoga

And then just finally, again just coming back to the compensation -

Rich Handler

And the fact that we did end with over $2 billion worth of cash on the balance sheet, so we had some flexibility.

Douglas Sipkin – Ticonderoga

Right. I know the book value did jump up quite a bit in the fourth quarter. And then just to get on the comp, I know it's not a perfect science. You guys are growing, but still I guess a little bit surprised just given the level of banking revenues, I always thought that was the business that had the most operating leverage when revenues get past a certain threshold. I know there's not a magic number, but what type of levels of banking do you guys think could drive a material drop in the comp ratio?

Brian Friedman

You really can't look at it that way, because if you look at 2010, while we had a very strong banking year and your general instinct is directionally right, at the same time we were hiring pretty aggressively in investment banking because we see a lot of opportunity, so that does offset it some. Secondly, it really goes down to the intricacies of mix. If you look at our business lines and you take it down to how many different trading groups do we have, and how many different sector groups do we have in investment banking, you get to some number of tens of different groups. So it really depends as much on the mix of how many of them are having stronger years versus not as strong years. So the mix really gets into it as much of anything. You're right, that if we're proportionally more investment banking then our margin is going to go up and our comp rate is probably going to go down, but it's hard to put it in that narrow a way. I think the important point is that in 2010 we were investing for the longer term. Just you can see it in the number of hires. We increased our headcount by almost 15% during the year. That was both on the front end as well as the support. That's a meaningful investment and as we said when we were reviewing the investment banking alone there's a lot that that's setting up for the future.

Rich Handler

We hope.

Operator

Your next question comes from the line of Michael Wong with Morningstar.

Michael Wong - Morningstar

I believe you mentioned the doubling of your year-over-year handled financial sponsor deals. Can you talk about what you're currently seeing in the financial sponsor market in terms of activity, access to financing, and your general positioning in that market?

Rich Handler

Sure, I'll just talk generally about the financial sponsor effort. I think financial sponsors have come out of the bunker with access to relatively low cost capital again, and transactions and companies that are trading at relatively reasonable value. And I think not just Jefferies, but across the board you're seeing increased activity, both on the acquisition financing of these transactions as well as potential merger and acquisition activity going forward. So it's generally a much more positive, conducive environment for financial sponsors.

Michael Wong - Morningstar

Okay. You've had two particularly strong sequential quarters of financial advisory revenue. Do you have any feeling of how sustainable this level is as it's magnitudes above your historical levels?

Brian Friedman

I'm not sure I'd use the word bubble, but as you wish. I think the answer is that as we broaden and deepen our sectoral coverage of our share of M&A business we think will stay strong. The third quarter was marked by a couple of exceptional transactions which we highlighted at that time. The fourth quarter is broader in the mix of transactions and is not dominated nearly the way the third quarter might have been by a couple of transactions. So I think the answer is this real business and we see good momentum in it.

Michael Wong - Morningstar

And going to your establishment of a futures division, is this coming off of strong demand from your current client base, or are you skating to where you think the puck is going to be when all this Dodd-Frank stuff is more or less handled or finalized?

Brian Friedman

A combination of the two. Number one, our existing client base, both in futures and derivatives, are very active, so therefore we have the relationships, we have the entrée. Secondly, it's definitely where we think the goal's going to be in terms of over the next year or two as the CFTC finishes its rule-making and the rest of it and as changes take place in the industry, we think opportunity is going to come out of that. So it's what I was referring to before in terms of the market is far from settled for our industry, and there's opportunity. So we're setting up, I think, to be in the right place.

Michael Wong - Morningstar

And just a followup on that, in general OTC derivatives will be centrally cleared. I don't believe that many of the clearinghouses are actually attempting to futurize those OTC contacts that they put through their clearinghouses. Do you believe that derivative exchanges will eventually plan to futurize those contracts, or that it's possibly too much trouble for the existing investment banks to develop swap execution facilities or deal with OTC derivative capital requirements, so are receptive to the exchanges developing future products and that's why you're going into futures at the moment?

Brian Friedman

You're asking a good question. I think that it's early for us to comment because as you probably appreciate, there are a lot of forces at work. There are people that are trying to maintain the status quo in their own interests. There's the direction of the regulation. And it has not yet settled, clearly, as to where we're going, but we're both keeping track of it and trying to put ourselves in a position to be a reasonable participant regardless of the direction it takes.

Michael Wong - Morningstar

And one quick question. Do you see any impact of the MiFID review on your European trading business - opportunities or threats?

Peregrine Broadbent

From what we understand in terms of that review, we don't see any material impact on our trading businesses in Europe.

Operator

Your next question comes from the line of Jeff Harte with Sandler O'Neil

Jeff Harte - Sandler O'Neil

A couple of kind of followups. One, on the M&A and [inaudible] advisory front, admittedly the league tables miss a lot of deals, but this is the second quarter in a row where the completed volumes we can get our hands on really didn't even come close to representing how strong your quarter revenue-wise would be. Is it the restructuring business? Are deals being missed? Do you have any idea what the discrepancy there is?

Brian Friedman

I don't think it's particularly the restructuring business. I think it's simply the fact that we were involved in some transactions that are not pure, traditional M or A, so for example, a joint venture formation doesn't always get picked up in the tables. Secondly, the sale of certain private companies doesn't get picked up in the table if the parties don't make a certain disclosure. So it is what it is. The tables were designed by whoever they were designed by and they work the way they do. We don't always get a fair shake in them.

Jeff Harte - Sandler O'Neil

Okay. And on the regulatory front, I get the futures side of it. Can you talk a little bit more about the impact of regulatory changes on you guys? I mean, you're not a bank holding company, so you're not necessarily going to have to face Basel III requirements. Have you had conversations with regulators? Is this a potential area where capital weightings could be a really significant advantage for you guys?

Rich Handler

I think what you're seeing in the regulatory environment is that we tend to operate under metrics that are well in excess of the rules that people are imposing on the banks. And I think the fact that we have the flexibility to run our business. We are not a bank holding company. We were never beholden to the government for any financial support. I think that mindset and that flexibility is real, and so it's an advantage for us quite honestly. It's an advantage in recruiting, it's an advantage in compensation, and how we manage our business. By the same token, we try to err on the side of being cautious because a lot of these rules are being put in place for the benefit of the institution. We want to make sure we're solid.

Jeff Harte - Sandler O'Neil

And finally, just the asset growth of the balance sheet. I think Peg had mentioned it was mostly in interest rates or in govvies. That would be a big increase in govvies if it kind of drove all of it. Can you give any more color into kind of more specifically - European versus U.S. or just how big a portion of the growth was actually govvies-related?

Peregrine Broadbent

Well, the majority of the increase was govvies-related, and I would say that of the increase the majority of the increase was U.S. treasuries as opposed to foreign sovereigns.

Brian Friedman

And recognize, given the scale of those markets, these aren't big numbers.

Operator

Your next question comes from the line of Steve Stelmach with FBR Capital Markets.

Steve Stelmach - FBR Capital Markets

I just want to circle back on the growth. In the past year or so growth has come from organically as well as aggressive hiring, but you guys haven't been averse of doing deals at least in the past. Are acquisitions still on the table in the target products or geographies? If so, what's of interest?

Rich Handler

I think we've stopped doing - not that we stopped looking for acquisitions, but we stopped doing them as the prices got a little out of whack in terms of how we traditionally like to do things. My guess is if you see us do things going forward it will be more in the joint venture type of a structure unless we see a unique opportunity with people who want to come in and partner and build as opposed to just cash out.

Steve Stelmach - FBR Capital Markets

And on the 34 new MDs, what should we have in the back of our mind in terms of a revenue per MD, that you guys think about when you recruit senior managers?

Brian Friedman

Well, you can take the numbers that we've given you and you can look at - it's not a pure linear relationship of the revenue to that number but we would hope to get it to be a pretty high single-digit million kind of number. So upward toward the $10 million number. Not necessarily all the way there every year, but that's probably a reasonable way to look at it.

Steve Stelmach - FBR Capital Markets

And this last question on fixed income trading, absolute level of rates, how should we think about revenue impact of shorter term rates going higher at some point, whenever they do in the future? Is that going to provide a headwind to that business? I would presume it would. Or how do you guys position the portfolio or the inventory for that eventual scenario?

Rich Handler

Well, this is not exactly rocket science, but generally higher rates tend to make [inaudible] businesses a little more challenging. We try to run as balanced and hedged of a book as you can for most of our businesses, but there's no question that artificially low interest rates create a huge opportunity over the course of the last year or two and as that changes generally fixed income could be more challenging.

Steve Stelmach - FBR Capital Markets

Right, so we should think about maybe a smaller balance sheet, just less inventory? Or just same-size inventory, just less profitability associated with it?

Brian Friedman

Again, it really depends, and the fact that we're hedged on a lot of the inventory means the rates alone don't determine necessarily our results.

Operator

Your next question comes from the line of Daniel Harris with Goldman Sachs.

Daniel Harris - Goldman Sachs

Staying on the fixed income, I was wondering if you can comment on some of the market developments we've seen over the past six weeks. First of all, in the muni market there's obviously been some dislocation. I'd love to get your views on how that's been affecting issuers as well as trading. And then more recently, on the rates move-up, how clients are positioning post that change?

Rich Handler

Look, there's been a lot of turmoil in the municipal bond business over the course of the last six weeks, and we've seen periods of time where there were it felt like gun-to-your-head forced sellers looking for any bid. And then we saw it very quickly evaporate into more demand on the buy side than the sell side. So there's clearly been volatility. For us, with the more customer flow orientation it's been generally positive, but the actual volume of activity has not been as high as a lot of the noise as people are trying to navigate what's going to happen between BABs and all the other types of securities. So it's been pretty volatile. We're customer-flow oriented, and it should be an opportunity for us we believe. What was the second question, on treasuries?

Daniel Harris - Goldman Sachs

Yeah, just on the yield move over the last 3 or 4 weeks.

Rich Handler

It's all as you would expect. You could feel a sense in the marketplace of people trying to gravitate out of fixed income into equities. And after having 2 or 3 years of every single inflow going into fixed income funds, to the point where they were so incredibly tight, I think there's generally a very positive development as the Fed tries to encourage people to go into more of the risk appetite assets. You see flows finally coming to equity and more flows into high yield and you see a more balanced approach. It's very hard to be enthusiastic about traditional fixed income products today relative to the equity markets.

Daniel Harris - Goldman Sachs

Okay. That's helpful. You mentioned flows. I was wondering, you know, another year's gone by. The asset management remains pretty small for you guys - the asset management business. How do you think about that going forward? Is this an area that you think will get bigger, or do you think at some point it just doesn't make sense to manage it the way it is?

Rich Handler

I think you're correct in your observation. As the rest of the organization has grown, the asset management business has not. Quite honestly, we've seen more opportunities to expand the rest of our business versus the asset management side. We're very happy with our current managers. It's a nice business for Jefferies today. It does not necessarily move the dial in a major way. I think we would be opportunistic if we found the right platform and the right group of people to do something with, but there's nothing imminent.

Daniel Harris - Goldman Sachs

And then just lastly, coming back to that clearing statement you guys had in the earnings release, what product specifically was this around? And how do you think that the errors actually occurred?

Brian Friedman

It's mortgages, and we'd rather not comment because until we're at the end of it, we truly don't know what the error, if any, might be. It could also be an error elsewhere. So until we're done, we'd rather not comment on that.

Operator

Your next question comes from the line of Patrick Davitt with Bank of America/Merill Lynch.

Patrick Davitt – Bank of America/Merrill Lynch

I missed some of the prepared comments, so I apologize if you spoke to this, but could you talk about any traction you're getting on the prime brokers side, to the extent you've seen growth in number of clients and whatnot, in balances?

Brian Friedman

The answer there - we didn't actually address it in our remarks, but it's been steady growth. It's not necessarily been exponential growth, but it's been steady growth.

Patrick Davitt – Bank of America/Merrill Lynch

Okay. And in the vein of Dan's question about the muni market, are you concerned at all about liquidity coming in such an issue there, like it did with you in high-yield a couple of years ago? And to the extent that it does, how do you feel like your risk management has changed so that you don't see a big mark-to-market issue if liquidity did lock up there from your portfolio?

Rich Handler

We're positioned very differently strategically in municipals than in the high-yield market. The high-yield market by its nature is a less liquid market than the muni market, and furthermore in the high-yield market we're proportionally a little more exposed on the distress side over the cycle than we necessarily would be in the muni market, although we occasionally do get involved in the distressed market there also. So I think it's really a different mix in inventory, a different scale of inventory, really different.

Patrick Davitt – Bank of America/Merrill Lynch

Okay. That's helpful. And finally, in terms of the amount of hiring you've been doing, and what I suppose is some up-front costs associated with that, is that amortized over some period? Or is it fair to assume that most of that cost is in the compensation expense we see this year?

Brian Friedman

Some of it is amortized. The up-front grants, etc. are amortized over a service period, so a little bit of that goes forward.

Operator

Your next question comes from the line of Richard Bove with Rochdale Securities.

Richard Bove - Rochdale Securities

As you speak, I can hear you saying all these positive things, and I’m watching the stock go lower and lower by the minute. And I'm making the assumption that the reason why the stock is doing so poorly is because there's a fear that if the revenue flow from fixed income is not sustainable, number one, that based upon the structure of your balance sheet that your cost of funding might go up. And perhaps, thirdly, that this $39 million may reflect not so much a charge going backwards, but a change in the profitability of this line of product, which would further negatively impact fixed income. I'm trying to get my hands around why the stock is plunging as you're saying all these positive things. And it seems to me it comes down to where are you going to go with this fixed income business, number one, and whether the cost of funding of the total balance sheet is being negatively impacted if interest rates start to rise.

Rich Handler

First off, we don't look at our stock on a moment-by-moment basis, and you could also say our stock ran up 15% the last three days in anticipation of our earnings, so what drives our individual stock, while it's interesting, and we pay attention, is not going to drive anything that we do. In terms of the $39 million, while we're not pleased with it, in reference to the size of our overall business, and what it means to our balance sheet, it's not particularly meaningful and as we said, we will go through every trade to try to make sure we get every single dollar that's due us. In terms of funding our business, I don't think anything has changed. We wound up doing a very nice 5-year financing at very attractive rates. We have plenty of capital. We're not running our fixed income business as many banks do, who fund below LIBOR with giant carry trades. It's basically a good customer flow business that we've been able to build over the course of the last 2 or 3 years of turmoil on the Street. I can't tell you why our stock is up or down. I can just tell you that our long-term focus is to build an investment bank, fixed income, equity business, quality research, and do it in a methodical way and we believe we're getting a lot of traction.

Richard Bove - Rochdale Securities

In other words, you don't see any changes occurring in the marketplace at the moment that would suggest that the fixed income business could be somewhat weaker in the next few quarters?

Rich Handler

No.

Operator

Your next question comes from the line of Joel Jeffrey with KBW.

Joel Jeffrey - KBW

I apologize if I missed this earlier, but could you talk a little bit more about the expenses you've incurred in building out Asia, and when you think that might actually turn profitable?

Brian Friedman

We've just begun, frankly, to incur those expenses in the latter part of 2010. I don't know that we can give you a precision, but we don't expect to be investing for several years. We do expect it to begin to pay off for us in the next 1-2 years.

Joel Jeffrey - KBW

So the added expense didn't have a material impact on results this year?

Brian Friedman

No. Was it negative? Sure, but was it material? Not necessarily.

Operator

At this time there are no further questions. I would like to turn the call back to Mr. Handler for closing remarks.

Rich Handler

Thank you everybody. Have a happy and healthy new year.

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