Sunday, March 16, 2008

"Macquarie has fared worse than Bear Sterns."

Head-kicker bank gets some of its own medicine

March 16, 2008

James Kirby
The Age (Australia)
Copyright 2008

It used to be: "Who's afraid of Macquarie Bank?" That's changed a little now. It's more like: "Who's afraid of Macquarie Bank getting into trouble?"

Less than a year after the outgoing chief executive of the millionaires factory, Allan Moss, told us that the US credit crisis would have little impact on Australia, the unthinkable is upon us - Macquarie Bank may soon be sacking people.

When Moss made his unfortunate comments (a rare slip it must be said) Macquarie Bank was roaring towards $100 a share. Now it is less than $50 - that's a 50% drop from top to bottom. In contrast most blue chips are down about 25% so far this year.

As the bank struggles with a shredded share price, it is cutting back on selective business divisions - such as residential mortgages - and talking of redeploying staff. Management will not rule out lay-offs if things get worse.

Any problems at Macquarie Bank will go though the market like wildfire - as Australia's only world-class investment bank it has innumerable connections with almost every leading business. Not to mention of millions of customers and investors.

What's wrong? First of all the bank has had some very public failures. A Macquarie hedge fund called Fortress is making severe cutbacks to secure its financial position. Worse still, a series of funds called the ALPS funds - pitched as high-yielding funds for small investors - is getting into all sorts of trouble as the US market throws up one disaster after another.

More worrying, investors are shunning "financial engineering" stocks such as Macquarie - MFS, a group that liked to style itself as a "junior Macquarie" has collapsed spectacularly with its former executives now being chased down by Citigroup to pay back loans.

But that's just what we see on the surface. It's the more subtle signals at Macquarie that are really turning heads in the market.

Sure, Macquarie has been sold down. But all banks have been sold down since the start of the year. The difference with Macquarie Bank is that it has been dumped.

At the end of last week Macquarie was not just underperforming the ASX, it was underperforming a string of global investment banks that have released the sort of bad news that would put Macquarie's seemingly marginal troubles at Fortress and ALPs to shame.

For example, Macquarie has fared worse than Bear Sterns, the Wall Street bank which is receiving emergency funding this weekend.

And remember that share price plunge at Macquarie has to be measured against local brokers suggesting late last year the stock could go to $120.

It's also time to say hats off to Jim Chanos. He's the Wall Street fund manger who compared Macquarie to Enron and called the bank his outstanding "short" idea (that is, the stock he saw as the outstanding opportunity for making money from its stock price falling). Last August Chanos may have been unfair, provocative and self-promoting when he made that "call" but it now looks brilliant.

While Moss and his replacement Nicholas Moore spend their days sticking pins into effigies of Jim Chanos and the equally influential British finance journalists Edward Chancellor of www.breakingviews. com who ensured the global market knew of the Chanos call, the bank is clearly trying very hard to raise as much cash as possible from depositors and lenders alike.

In the cash-raising department MacBank, for years a notorious scrooge when it came to paying deposit rates, is suddenly offering respectable rates, even for its cash management trust.

And when it comes to squeezing more money out of anyone who has loans with the bank, Macquarie is in a league of its own. As Commonwealth Bank and other banks get publicly mauled for putting up rates by a fraction more than Reserve Bank's 25 basis-point guideline (CBA raised its rates by 0.35%) Macquarie raised its low-doc rate by 0.7%. Now if the CBA and the other "big four" banks are upsetting the Reserve Bank with their changes then Macquarie's move must be making them palpitate.

Of course nobody ever expected Macquarie - the most aggressive, head-kicking bank we've ever seen in Australia - to become reasonable when the chips are down. But the investment bank most famous for squeezing fees from everyone at every level is now at the mercy of the market and the market is paying back in kind.

© 2008 The Age:

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