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GFI Group Issues Statement on Credit Markets

Posted on | September 26, 2008 Time: 4:13 pm |

GFI Group CEO Michael Gooch issued a statement on Wednesday discussing the state of the OTC credit markets. As I had just posted earlier that same day essentialy begging the company to reach out to shareholders, I take the result as a low to medium on the usefulness scale. I was hoping for a frank discussion of the state of the market - how much deleveraging they are seeing, how many customers are on the sidelines, and the global effects of our domestic credit freeze. Instead we got this:

GFI welcomes effective regulation of the U.S. credit derivatives market. Appropriate regulation should encourage greater transparency and automation of the market. GFI is well positioned to operate in a regulated environment. GFI’s Equity (cash and derivatives) business is highly regulated and has grown at a compound annual growth rate of 53% over the last 5 years.

“Any efforts by regulators to encourage centralized clearing of credit derivatives will likely benefit the credit derivatives market in the long term. GFI’s electronic trading platform for credit derivatives is extremely active in electronic and broker-hybrid trading outside of the United States. GFI would welcome a move towards electronic trading of credit derivatives in the U.S., whether initiated by dealers or regulators. GFI has been a leader in efforts to launch centralized clearing for OTC credit derivatives, serving on the board of The Clearing Corp and investing in the firm in December 2006.”

Mr. Gooch concluded: “In the event that the government agrees to an intervention in the financial markets, that prospect should benefit the financial markets and create opportunities for intermediaries and may offset some or all of the de-leveraging pressure that financial institutions and their customers are currently experiencing. Many traditional dealers in all areas of the inter-bank market are actively taking less risk and market price discovery has never been more important. I believe that GFI’s services will be more valuable to its customers as dealers increasingly look to lay risk off quickly through inter-dealer brokers.”

The rest of the press release (see here) was the company trying to drive the stock by pointing out a solid balance sheet (which they do have, with over $450 in equity) and noting that about 25% of their business is related to credit derivatives, with 60% of that being overseas trading.

That doesn’t do much to allay my already thick fears of an earnings meltdown in the third quarter. After all, 20% of revenues still came from commodity markets, 18% from “financial products” (including freight, energy, and precious metals), and over 30% from cash (forex), interest rate, and equity markets.

I’m happy for the top-line diversification, but if earnings were in any way shielded why not give some clarity on the number? With the stock down over 80% in the past year, the stock has a meltdown already priced in. The company reports third quarter results on Oct. 30, and my previous thesis statement on GFIG can be found here.

Ryan Barnes

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