Jefferies Q4 2007 Earnings Call Transcript

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 |  About: Leucadia National Corporation (LUK)
by: SA Transcripts

Jefferies Group, Inc. (JEF) Q4 2007 Earnings Call January 7, 0000 3:00 AM ET

Executives

Richard B. Handler – Chairman of the Board, President &Chief Executive Officer

Peregrine C. De M. Broadbent – Chief Financial Officer &Executive Vice President

Joseph Schenk – Former Chief Financial Officer

Analysts

James Ellman – Seacliff Capital, LLC

William P. Tanona – Goldman Sachs

Jim [Delyle] – CambridgePrice

Douglas Sipkin – Wachovia Securities, Inc.

[Abi Goshe] – Banc of AmericaSecurities

Peter Kuechle – Frontier Capital Management Company, LLC

Patrick Pinschmidt – Merrill Lynch

Lauren Smith – Keefer, Bruyette & Woods, Inc.

Operator

Welcome to the Jefferies’ investor conference call. Aquestion and answer period will follow management’s prepared remarks. (Operator Instructions) As areminder this conference call is being recorded. A press release was distributed via businesswire before the market opened today and can be accessed at Jefferies website www.Jefferies.com.

Some of the comments made in this conference call mayinclude forward-looking statements. These forward-looking statements may contain statements aboutmanagement’s current expectations, strategic objectives, growth opportunities,business and prospects. Theseforward-looking statements are not statements of historical fact and representonly Jefferies belief’s as to future performance. They usually include the words continue,will, believe, should or other similar expressions. Actual results could differ materially fromthose projected in those forward-looking statements. Please refer to Jefferies annual report onForm 10K filed with the Securities & Exchange Commission on March 1, 2007 and the Jefferies’ Form10Q & 8Ks for discussions of important factors that could cause actualresults to differ materially from those projected in these forward-lookingstatements.

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

Richard B. Handler

Thank you for joining out call to elaborate on the pressrelease we issued this morning regarding Jefferies’ 2007 year end results andto respond to any questions you may have. I am Rich Handler, CEO of Jefferies and with me on the call today areBrian Friedman Chairman of our Executive Committee, Hank Broadbent our new ChiefFinancial Officer and Joe Schenk our former Chief Financial Officer who retiredfrom Jefferies on December 31st of last year.

Our goal on this call is to specifically explain theanticipated results for 2007 and our fourth quarter and answer any questionsthat you may have regarding our firm or the current environment. We historically have never given resultsguidance and do not intend to exchange that practice now or going forward. However, these are unique times and webelieve this announcement and call are important and necessary.

We’d like to begin by providing some background to thismorning’s release. It’s hard to imaginethe last number of months being uglier for US financial services. For Jefferies and for a spectacular first sixmonths of 2007 when our firm was clearly firing on almost every cylindervirtually overnight just with every one of our businesses was impacted at theexact same time by the market environment. We also made some business personnel and risk choices that we regret buthave now fixed.

The facts are very simple. We are a company that has had seven and three quarter years of almoststraight up growth. We have transitionedsuccessfully from a relative pure broker into a full service global investmentbanking and securities firm. Ouremployees are heavily staked through significant [inaudible] ownership in ourfirm and as such we are well aligned with our outside shareholders. Our balance sheet is secure, highly liquidand grounded with long term capital that we have raised opportunistically atattractive rates and with very long maturities. Our balance sheet contains assets that weunderstand clearly, are marked properly and almost entirely against transparentmarket valuation. These are securities and assets that we know well and want toown.

We have had ample opportunities to venture beyond our areasof true expertise and comfort and we passed on each of these. Instead we have focused on our core operatingbusinesses which we believe are healthy and full of opportunity for growthwhere we very much like our market position. We understand investment banking, sales and trading, research and assetmanagement. We like these businesses andare good at them. Our clients value ourexpertise and need our services. Thereis opportunity for growth in each of our core businesses both domestically andglobally.

All that being said and for successfully protecting our firmwide platform as chief stewards for 31 consecutive quarters in the face of ahorrendous environment we expect to have loss about $24 million of ourshareholders’ capital during the fourth quarter. Although this represents less than 1.5% ofour over $1.8 billion shareholders’ equity we are disappointed with ourselvesfor allowing it to happen. Our pressrelease highlights the fact that we had reasonable results in each of our corebusinesses: equities, fixed income and commodities and investment banking. Each of these businesses is healthy but noneof them performed fully up to our expectations primarily because theenvironment was so difficult but also because of a mistake we made which wehave now corrected.

The core businesses were seemingly not doing too badly sowhat went wrong? Our results for thefourth quarter were adversely affected by traded losses by two of our principaltrading team, a minimal loss in our core high yield business versus ourhistorically profitable results, losses on our investment in our hedge fundplatform and finally despite the satisfactory results recorded by ourinvestment bank we missed a bunch of expected revenues due to the postponementof numerous deals due to market condition. Additionally, we have been investing heavily in our company for the pastseven years. There is always a lag timebetween new hires, new businesses and corresponding production and revenues.This confluence of events when combined with a need in our opinion tocompetitively compensate our most important asset, our people is the reason weexpect to report a loss in the fourth quarter.

We would now like to put you directly in our shoes to seethe decisions we made and why. In midOctober when we released our third quarter earnings we indicated that Octoberhad begun on a very positive note after the Fed action. We had already recorded two extremely strongweeks in our trading asset management businesses and as we said on our earningscall our banking backlog indicated a likely result well in excess of the over$175 solidified million we now expect to report. Historically, the fourth quarter has alwaysbeen our stronger and while we’re not counting on this pace for the first twoweeks to be sustainable for the full period we were extremely active across ourplatform and were benefiting from the intrinsic operating level in our businessthrough an instable environment.

At that time we were feeling confident about the potentialfor our typical fourth quarter home stretch which would have allowed us to haveanother full year of solid results. Unfortunately, as we all now know November and December were brutal andI would like to provide you with an exact road map of the items to which wejust referred. First, we lostapproximately $17 million and $15 million from two principal tradingteams. We immediately shutdown oneoperation and began significantly hedging out the risk of the other as soon asloss limits were exceeded. Both of theseteams are made up of quality people who we know well and they had clear trackrecords as money makers focused on securities in which we have true expertise butthey got caught up in the meltdown and the money was gone. Our risk management systems worked and welimited the losses but they both happened at the exact same time and ithurt.

Second, we loss $14 million in the fourth quarter on our UShedge fund capital investment seeding program compared to revenues of $10million and $5 million in the first and second quarters respectively. We have 11 separate funds in which have aninterest and eight of them had positive returns for the year. Although we believe they are all qualityportfolio managers the fourth quarters was tough on many of them and overall weloss money. We believe strongly in thisbusiness and our managers but will of course be vigilant in our ongoing riskoversight and capital allocation.

Third, we anticipate Jefferies high yield trading willrecord a fourth quarter loss of revenues of approximately $5 million comparedto positive $34 million in Q2. It isimportant to know that despite the downturn in results are core high yieldtrading business has weathered the storm extremely well. Under the old Jefferies Partners OpportunityFund structure we were up 2.9% net for the first quarter of the year. We transitioned to the new Jefferies HighYield Trading Platform in the second quarter with a positive 2.5% net. In a course of one of the worse tradingenvironments I have seen in my career we were down 70 basis points in the thirdquarter and an estimated 60 basis points in the fourth quarter hardly adisaster. We protected our and our investor’scapital, employed zero leverage and have drawn down and employed only afraction of our available capital. Thatsaid we usually make a reasonable amount of money in this business so when agood level of profits are replaced even by minor losses it has a meaningfullyimpact on the Jefferies Group’s bottom line.

As we said earlier we are not going to give guidance goingforward and the future is always uncertain. That being said we’d like to walk you through some specific maps becauseit may help you better understand the operating model of our firm. If you add up the four enumerated losses fromthe fourth quarter it totals a loss of approximately $51 million. If you compare that loss to the secondquarter and the few trading teams mentioned not meaningfully in operationJefferies High Yield trading and our investment in the UShedge funds together generated positive revenues of $39 million. The differential in review is approximately$90 million. Given that we have alreadyabsorbed the fix costs of these operations at, for example, an 80% incrementalcontribution rate and a 39% tax rate net earnings would have been $44 millionhigher. In a separate example in lightof the fact that our fourth quarter is generally our strongest of the year for investmentbanking an incremental $50 million in banking revenue, a 75% incrementalcontribution rate and a 39% tax rate would yield incremental net earnings of$23 million.

In mid October we were experiencing the positive side of allthese businesses and our outlook was for a strong finish to the year consistentwith the then prevailing environment and our past experience. We provide these illustrations not as aprediction of the future but to confirm to you our view of the leverage of ourplatform which unfortunately worked against us in November and December. The bottom line is that these revenues didnot materialize and the losses did.

We have taken immediate and decisive action to address anumber of issues. We have shut down thetrading accounts that lost the money, we terminated a number of employees inthese and other business units, we changed management in certain areas, we aremodifying some of our compensation formula and more than ever we are focused oncontaining our non compensation expenses. As a result of the losses and overall revenue shortfall as well as themix of revenues which affect the company’s flexibility in its year endcompensation process Jefferies expects to incur significantly highercompensation costs in the fourth quarter and this is the primary variance thatresults in the quarterly loss.

Subject to market conditions we believe in 2008 we canachieve appropriate profits in high yield and distress trading as we have for17.5 of the past 18 years and improve and then grow the profitability of allour trading asset management businesses. Our investment bank has great momentum and continues to evolve towardsthe global leadership position we believe we can achieve.

In 2006 Brian and I were granted restricted shares inrespect to 2007 with a current value at that time of $6.5 and $13 millionrespectively. In light of our recentresults we will receive no bonuses in respect to 2007 and we have at thecompensation committee at the board to reduce our future compensation by thevalue of the number of shares we were granted effectively negating our grantfor 2007. We are doing it this way onlybecause these grants have been largely amortized already and by reducing ourfuture compensation the benefits will be reflected in our results overtime.

Through September Jefferies had reported seven and threequarter years of record performance. Unlike many of our competitors we have no accounting issues, no seriesof one time write downs and no structural issues based on faulty business ormiss marked inventory. We expect our netrevenues for 2007 will be an all time record and are expecting earnings inexcess of $140 million will be the third highest in the firm’s 47 yearhistory. We are proud of Jefferies andbelieve our firm has tremendous momentum. We do not know what the future holds regarding the marketenvironment. It is possible that themarket rebounds quickly possibly spurred by Fed action or a global growth[inaudible]. Alternatively we will beliving the second half of 2007 for some period of time.

We have a clean balance sheet, we are highly liquid. We have 2,545 highly motivated employeeshareholders and a loyal client base that understands our ability to addvalue. Regardless of the environment weare committed to doing our absolute best every single day and delivering valuefor our shareholders, clients, employees and bond holders. We are no happy with our fourth quarterresults but we chose to get them out of the way early so we can all go back towork immediately and do our absolute best in 2008. With that we’ll be happy to answer anyquestions you would like to ask.

Question-and-AnswerSession

(Operator Instructions) Your first question comes from the line of James Ellman with SeacliffCapital.

James Ellman –Seacliff Capital, LLC

Could you comment on the increase in the compensation ratioyou mentioned? And also, the total noninterest expense line in aggregate? But,would you expect it would actually go down in the first quarter with theactions you’re taking?

Peregrine C. De M.Broadbent

I’ll take the second part first. On the non comp operating expenses we expectthat those expenses will level off at current levels and potentially go down alittle bit into 2008. We previouslydisclosed that in 2007 particularly in the second half we were baring duplicatereal estate costs in London as wellas some additional costs in New York. That will continue a little bit into thefirst and second quarters of 2008 but is pretty quickly going away. On some of our other expenses we believe thatover the next several quarters we will be able to contain them and possiblyreduce them so I think that the aggregate answer to your question is that ourfourth quarter levels should prevail into the early part of next year, not goup and over time we may be able to slightly reduce them.

As far as the comp expense we haven’t finalized our 2007numbers yet and the comp is still being worked on but our expectation is thatit will be meaningfully higher for the quarter because an x percentage pointchange for the year translates into four times that for the quarter. So, for example we’ve been running in priorquarters at 54.5, if we are up on the order of 500 basis points or so whichwould not be a surprise to us. Thatactually raises the quarterly rate by over 2,000 basis points. I think that gives you a bit of guidance butit’s also being completed and we’ll be announcing final numbers two weeks fromWednesday.

James Ellman –Seacliff Capital, LLC

Alright. And, wouldyou expect that that comp expense ratio or comp expense as a total dollarfigure would drop significantly as you move into 2008?

Peregrine C. De M.Broadbent

Yes.

James Ellman –Seacliff Capital, LLC

Finally, with the decrease in comp ration in 2008 versuswhat we’ve been seeing so far in terms of particularly in the debt underwritingactivity going on in the market should we expect if the trends continue on therevenue side to expect the company to make money in the first half of theyear? If your current revenue trendscontinue?

Richard B. Handler

We’re in the business of making money and we want ourbusiness model to make money. We’re notpredicting the future but we’re not use to not making money and we plan to doour best going forward.

James Ellman –Seacliff Capital, LLC

But, could you give us any commentary or any sort of insightin terms of what you’re seeing currently in terms of revenue trends?

Richard B. Handler

It’s about three days into the quarter. It hasn’t been a wonderful week last week andwe’re basically putting 2007 behind us getting ready for 2008.

Peregrine C. De M.Broadbent

The quarter begins in earnest today.

Operator

Your next question comes from the line of William Tanonawith Goldman Sachs.

William P. Tanona –Goldman Sachs

Could you guys give us a little bit more granularity as towhat the trading strategies or the trading desk were that loss the $17 millionand the $15 million? And, just givensome of the comments you made it sounded like these were desks that were justopened in the fourth quarter? I wantedto see if that was right? As well ifthese were new strategies?

Peregrine C. De M.Broadbent

They are desks that were opened essentially at the beginningof the third quarter and we have in addition to our high yield equity convertiblefixed income general operations we had about six different trading teams thatwere trading on more of a principal basis. Some of them have been with us forlonger periods of time. These twounfortunately, started up on early July and because of the environment incurredthe losses. So, it was two out ofsix. The two were shut down the otherfour were all profitable in the fourth quarter.

Richard B. Handler

And the securities they were trading were high yield andlisted equities.

William P. Tanona –Goldman Sachs

In terms of you talked about head count outside of thosedesks and you talked about other head count reductions as well. Can you give us a sense as to the size andthe magnitude and where those were impacted?

Richard B. Handler

The narrow head count reduction of the most recent number ofweeks is am modest reduction in the order of 15 to 20 people. From time-to-time over the course of 2007 aswe have grown and absorbed our growth we have had some number of terminationsbut these specific ones that we’re referring to are relatively modest insize. This is not a layoff it wasselective terminations either because of performance or other changes in theenvironments.

William P. Tanona –Goldman Sachs

Then I guess lastly as I think about the comp I mean youguys had been pretty aggressive in building out over the course of the lastcouple of years even with this fourth quarter results you still put up recordrevenues so I guess I’m looking at the compensation line and saying yourrevenues seem to be up around 7% year-over-year to records yet your comp is up20% or appears that it’s going to be up 20%. Was the primary driver of that because of all these new hires that youhad made? Or, was it more of thecompetitive threats that you felt out there? I’m just trying to connect the dots.

Richard B. Handler

It’s always a few different things but it’s not so much thehires we made. It is the losses weabsorbed because just to be clear where the numerating $51 million of lossesfrom four sources and we’re suggesting that our revenue for the quarter, I’mjust going back to our press release to get the exact number, $345 to $365 andlet’s just use the midpoint for a moment. If $51 million of losses had not materialized that means we actually hadrevenues in excess of $400 million. So,first of all we’re paying comp and incurring costs on revenue that isessentially negated by the losses. Secondly, to the extent that we expected and probably the whole marketexpected stronger revenues in the second half of the year particularly in thefourth quarter to the extent that those revenues did not materialize there issome amount of fixed costs that’s associated with it that you can’t eliminatefast enough.

So, there’s really a number of factors. Also, a little bit of severance. But, those are the two primary drivers. The fact that we have losses that offsetrevenues and you’re compensating on the positive revenues as well as actuallyhaving a small amount of costs associated with the losing businesses. Secondly,you have a certain amount of fixed costs and you can argue that they’re notnecessarily fixed costs in the traditional sense, they can be somewhat variablecosts but in short periods of time they are relatively fixed. So, the timing of all of this being in thefourth quarter being that there’s no other quarters to the year in which torecover it the fact that the revenue disappears even if it comes next year itdoesn’t help this quarter it all contributes to the number.

William P. Tanona –Goldman Sachs

That’s helpful color. Lastly, on the asset management side you also talked about the lossesthere. Have you rethought yourstrategies as it pertains to kind of the hedge fund business and yourwillingness and ability to seed additional funds?

Peregrine C. De M.Broadbent

We continue to believe in the strategy. We continue to be willing to seed funds. We do it on a very, very selectivebasis. If you caught what we said wehave currently 11 separate funds. Eightof them had positive returns for the year so the losses derived from arelatively small number of them. Obviously, the overall results were a little weaker in the fourthquarter. These aren’t big numbers. In other words, versus what we’re trying todo we think that this unfortunately is the vagaries of the marketsovertime. If the only thing thathappened in our quarter was that our hedge funds had had a weaker result wewouldn’t be having this phone call. It’sthe aggregation of that with all of the other factors that bring us to thiscall.

William P. Tanona –Goldman Sachs

I guess just as I think about those numbers if that manyfunds had performed well or had positive results to have that big of a declinein the asset management revenues would suggest that they had pretty outsizednegative returns. Is that correct?

Peregrine C. De M.Broadbent

You’re right to try to isolate it. It is two factors. One isthe level of negative returns and the other is the relative capital. In other words, each of our funds are in differentpoints in their gestation so that the amount of capital that’s committed toeach fund will vary. We won’t go intothe specifics of how much capital is in a particular fund or the individualperformance of a specific fund but if eight out 11 were positive and three outof 11 were negative one could assume that one or more of the negative fundswere among our larger funds and that can happen obviously.

Operator

Your next question comes from the line of Jim [Delyle] withCambridge Price.

Jim [Delyle] – Cambridge Price

My question gets at just trying to determine that the writedowns are over in terms of some of the investment. I refer back to a particular – you folks andI’m not sure which of your funds of even if it is a fund that you’re referringto in the write down today with the $25 million investor and NovaStar preferredback in July of last year. I waswondering if that was included in the write downs and which funds they were in? Or, if they’re not included whether Jefferieshas any risk to that?

Peregrine C. De M.Broadbent

That holding is in a fund that is substantially third party capital. It represents approximately 4% of the totalcapital committed to that fund. So, it’snot material to that fund. Moreover,Jefferies economic investment in that fund is approximately 8%. So, 8% on $25 million is $2 million. That would be the gross exposure of Jefferiesand yes it has been marked to market and we believe is not material in anywayto Jefferies.

Operator

Your next question comes from the line of Douglas Sipkinwith Wachovia.

Douglas Sipkin –Wachovia Securities, Inc.

Just a broader question if you could provide I guessrelative to the past what percentage of compensation is variable now generallyspeaking compared to maybe 2003, 2004 and 2005?

Peregrine C. De M.Broadbent

We don’t have off the top of our heads what that percentagewill be. But, what I would point out toyou is that there’s no materially change in the amount of our compensation thatis “variable”. What you have torecognize is that variable compensation takes several forms. So, in the case of some of our personnel itvaries with the revenue that the produce but once they produce that revenuethat compensation can be paid on a monthly or a quarterly basis. The bestexample of that would be our sales people. In the case of our bankers it is also variable. It doesn’t follow as strict as set offormulas and is paid at year end. So, aproposyour question the variability of our overall compensation probably stays atvery high levels and higher than possibly others, I don’t know what othersdo. But, at any given short term periodthat variability can be very limited because payouts take place on a periodicbasis. They don’t come back so thatcompensation from all sales people for the earlier parts of the year hasalready been paid. So, there’s adefinition of variable that is correct but you have to distinguish between thatwhich is directly tied to revenue and that which is more discretionary and haseven greater variability.

Douglas Sipkin –Wachovia Securities, Inc.

Okay. That’shelpful. Then just shifting gears alittle bit spending a little more time on the asset management business giventhat it looks like we are in a new environment with volatility and lesscorrelation, less predictability have you guys given some thought to mayberolling out or acquiring more traditional asset management products which couldmaybe provide a little bit more stability and maybe sort of work like I guessan asset management business should in terms of generating more stable feeincome. Because, it does appear thatvolatility is here to stay.

Peregrine C. De M.Broadbent

We are constantly looking at opportunities. We’ve been reluctant to go into the morestandard asset management businesses primarily because they tend to have lowergrowth rates and at the same time the valuations have been relatively heady andwe haven’t felt that would make a real value contribution to our platform. We find that the potential margins in thealternative asset platforms are very attractive and while others have acquiredtheir way into it we have tried steadily to build our way into it. There is a matter of gaining critical massand gaining maturity in it. We obviouslyhaven’t got there in these last few months may have slowed it down a little butwe still very much believe in our potential. It doesn’t rule out the possibility that we would acquire in the future.

Richard B. Handler

By the same token we’re living this everyday. We recognize that the environment haschanged. We recognize that valuationshave changed, opportunities have changed. And, one of the good pieces of news through all this is we still have avery stable, clean platform to build from. By the same token we recognize that risk and volatility seems to beevery where we step these days and we’re being prudent about it and making surethat we do the right thing on a daily basis and look at all opportunities.

Douglas Sipkin –Wachovia Securities, Inc.

Just finally, which I always ask just your pulse – the highyield market – there is some feel that the fall rates in 2008 are going to jumpmaterially off of a very low number 06 and 05. Is that necessarily a negative for you guys or is it opportunities thatyou might be able to discover in the distressed world or if you anticipate thatstuff correctly?

Richard B. Handler

First of all I don’t think there’s any question that thefall rates are going to have to go up here. There still at a relatively historical low. So, when we raise our new high yieldopportunity trading business – set it up with a six year lockup anticipatingsome pretty ugly times. And, I thinkwe’re positioned extremely well, that’s what we were trying to do the last sixmonths is make sure that we did not dig ourselves into too big of a hole towhen it gets really ugly to be able to take advantage of it. That’s really how we’re situation rightnow. [Inaudible] between 60 and 70 basispoints by the same token it’s the type of environment where we can get reallysmacked very hard and I do believe that falls are coming and I want to makesure we’re positioned to take advantage of it. It’s more of a long term strategic money making opportunity than anyweekly, monthly or quarterly but it represents a huge opportunity for us andthat’s why we have more capital than ever, why we haven’t employed any leverageand why we had the capital locked up for six years.

Operator

Your next question comes from the line of [Abi Goshe] withBanc of America Securities

[Abi Goshe] – Banc ofAmerica Securities

On the compensation line were there any contingent paymentstriggered during the quarter related to your acquisitions you guys had madeover the years?

Peregrine C. De M.Broadbent

In connection with several of the acquisitions there areearn out payments that are made from time-to-time but they do applycontinuously through the year so the answer is yes.

[Abi Goshe] – Banc ofAmerica Securities

Now, were they relatively outsized of what you guys wereinitially thinking?

Peregrine C. De M.Broadbent

Two points: number one, they weren’t extraordinary but numbertwo, they are not in the compensation line of our income statement they areadded to the acquisition price and go on to our balance sheet.

[Abi Goshe] – Banc ofAmerica Securities

[Inaudible] One otherquestion you guys said you had roughly $51 million in losses in Q4 and thatcompared to $39 million in positive revenues in Q2 or was that in Q3?

Peregrine C. De M.Broadbent

We were comparing it to Q2.

Richard B. Handler

We were comparing it to what we hope is a stabledenvironment versus a non stable environment to give you a sense of themagnitude.

[Abi Goshe] – Banc ofAmerica Securities

Do you have the corresponding Q3 number as it relates tothose four areas?

Peregrine C. De M.Broadbent

If you go to our third quarter release you will see that ourhigh yield I think was negative $7 million revenues and in the asset managementarea you’ll see that the loss in our asset management investment I believe wasapproximately $12 million. The twotrading teams’ numbers are not separately broken out so you wouldn’t see thatthere. But, you would find those twonumbers there.

Richard B. Handler

But you also have to contract the third quarter whichhistorically has been one of our slower quarters with the fourth quarter whichhas historically been one of our best quarters which really magnifies thevariance.

Operator

Your next question comes from the line of Peter Kuechle withFrontier Capital.

Peter Kuechle –Frontier Capital Management Company, LLC

Just a quick question given the quote in the press releaseabout substantial liquidity and where your stock stands today just yourthoughts on buybacks.

Richard B. Handler

We did buy back stock during the quarter. I believe the number was roughly 3.4 millionshares is what we purchased which for us was a very large by historicalstandards purchase. I think the averageprice was roughly $24.25. So, give me aC- on my trading ability today versus then. But, the point is that we believe in the platform of this company andthe one thing that is fortunate is that we’re in a situation where we’re notgoing outside looking for cash to sure up our business. We have a very strong capital base and one ofthe things you do in times like this is take advantage of it and buy stockin. But, by the same token we’re very cognoscentiof making sure we do well by the rating agencies and the bond holders so webalance all constituencies.

Operator

(Operator Instructions) Your next question comes from the line of Patrick Pinschmidt withMerrill Lynch.

Patrick Pinschmidt –Merrill Lynch

I’m just curious what if any changes you may have made to your risk systems given whathappen with the two principal trading teams? And, beyond that if you’re comfortable with the levels of the remainingteams.

Richard B. Handler

The reality is our risk systems work extremely well. We knew the businesses that we were in, weknew the securities that we owned, we knew the people who were managing themand we knew the thresholds that we were willing to basically live with. The reality is that in a very short period oftime volatility got exceptionally high and we decided to close down thesepositions and even from the moment we decide to close them down to the actualexecution of closing them down there was some [inaudible] there as well becauseas you all remember in November and December there weren’t a whole lot of bidsthat were abundant. We found them and wedealt with them. I would just add in thespectrum of our entire firm and the global capital base in all of ourbusinesses while we’re extremely embarrassed and not happy about them they arenot major events they just happened all at the same time when we had a revenueshortfall.

Operator

Your next question comes from the line of Lauren Smith withKBW.

Lauren Smith –Keefer, Bruyette & Woods, Inc.

Just two quick ones – what is remaining on your current buyback authorization?

Peregrine C. De M.Broadbent

I believe – how much was given? 1 million and 1.6 million, is that right?

Richard B. Handler

Somewhere less than $2 million shares.

Lauren Smith –Keefer, Bruyette & Woods, Inc.

Okay. Given that youbought around 3.4 at significantly higher prices would we expect potentially anadditional authorization?

Peregrine C. De M.Broadbent

Remember, we do issue stock to people as part ofcompensation. We are very mindful ofdilution and we basically want to make sure that we do the right things interms of dealing with our share account. We have a regular board meeting in two weeks which would normally be forour fourth quarter numbers and we’ll address it then.

Richard B. Handler

And, we are in a blackout until after that board meeting andthe formal announcement of our numbers.

Lauren Smith –Keefer, Bruyette & Woods, Inc.

Lastly, can you be more specific about you said you madecertain management changes could you be a little more specific about that inwhat businesses? Or, are you really justreferencing the principal trading group?

Peregrine C. De M.Broadbent

We made several changes in our equity department. We previously had two co-heads. We named one of those two as sole head of thedepartment. We wanted to have a singularvoice in that department and we wanted to be sure that the execution focus washeightened. In addition, we took bothour sales and trading derivatives and put them under one gentleman who hadpreviously been operating the sales side of it and we think those movestogether with other changes that we made over the last year give us a morefocused and clearer management structure.

Operator

(Operator Instructions) At this time there are no further questions.

Richard B. Handler

Thanks everybody. We’re going to go backto work and do better for you in 2008. Thank you.

Operator

This concludes today’s Jefferies’ investor conferencecall. You may now disconnect.

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