[by Larry Goldfarb]

What explains the excessive valuation of Jefferies by  Leucadia National Corporation of 1.2 times the firm's tangible book value?  Consider the fact that the stock market values
Goldman at 0.9 times its tangible book value. Investors are even less sanguine about Morgan Stanley, awarding it a price to book value of only 0.6 times.   There seems to be little reason for Jefferies to have a superior valuation. It has a credit rating of Baa3 from Moody's, three notches below Goldman's rating of A3. Jefferies is paying around 6.2 percent when it borrows for longer periods in the market, whereas Goldman is paying only 2.1 percent. Solid credit ratings and a low cost of borrowing are critical for
investment banks, which rely on markets for their financing.

So what explains the valuation gap?

• One theory is that the market is unduly pessimistic about the health of Morgan Stanley and Goldman. The companies' valuations have actually improved as their stock
  prices have risen. That could continue until they trade about tangible book, especially if global markets
  continue to stabilize, economic growth strengthens and the uncertainty surrounding new Wall Street regulations lifts.
• The alternative view is that the market doesn't like the size and complexity of Goldman and Morgan Stanley, which also have higher leverage than smaller investment banks.

While theories can predominate, I believe that there are two reasons for the high valuation.  First, Leucadia wanted to buy Jefferies and the price was reasonable.  Even at the lower
multiple, both Goldman and Morgan would fetch prices that were a multiple higher than that which Jefefries was sold.  Second, the Street does  not know how to value
a large complex investment bank.  Years ago, Salomon brothers which owned oil refineries from its Phibro merger, was valued at a level below the book value of the refineries.  Analysts said that the difficulty of valuing the investment bank depressed the value of the entire enterprise.

For more information, please read [NYT Dealbook, 11/13/12]