Macquarie Bank is no Bear Stearns, Lehman Bros or Merrill Lynch. Nor is it a Babcock & Brown or Allco Finance Group.
But it faces the same unseen enemies that profited handsomely from the collapse in their share prices.
Macquarie is a prime target of the market manipulators whose primary weapon is false rumours. This was confirmed today when the Australian Securities and Investment Commission said it would be extending its investigation into market manipulation that was started in March and would include suspected market manipulation in Macquarie shares.
Macquarie was already under the gun before ASIC’s attempt to head off a more concerted attack on its shares.
Its stock has fallen 60 per cent in the past year, 34 per cent in a month and is down 25 per cent on its March low. The stock fell 7.8 per cent yesterday to $33.93 on heavy turnover.
Judging from the trading in its shares there is a lack of understanding of just how different Macquarie is from those financial groups that have collapsed, disappeared or imploded this year.
Macquarie is not a brokerage like Lehman Bros. It is a licensed bank that abides by all the tough regulatory capital and risk management obligations that go with that. It has no exposure to toxic US sub-prime securities and no holdings of over-valued US property. Also, it is not engaged in proprietary trading.
Despite that it faces a tough and somewhat delicate decision. Should it sit tight and let the negative sentiment wash away? Or should it do something and, in doing so, risk triggering a panic?
The natural tendency for Macquarie, with its slightly brittle exterior and prickly relationship with the outside world, is to sit back and do nothing.
The thinking inside Macquarie is: Why step outside the normal timetable for public disclosure when it is so profitable and has such a proud heritage of successful risk management? It regards its fulsome public disclosures of its financial position in February, May and July as more than sufficient. As recently as the past fortnight deputy managing director Richard Sheppard has been on a an offshore roadshow retelling the story.
Macquarie is expected to report record normalised profits of $1 billion for the half year to September. The half yearly result is expected to include no material impairment of its assets.
However, its overconfidence in the bank’s present financial strength may be ignoring the seriousness of the loss of confidence in world financial markets. Investors, bankers and regulators are on edge about who will next go bust or need financial assistance.
Being a bank is not necessarily a guarantee against a loss of confidence caused by a collapse in the share price, as unwarranted as that collapse may be. Borrowing short and lending long works well as long as you can continue to borrow short.
The Bear Stearns collapse showed how rapidly confidence in an institution in wholesale markets can evaporate. Bear Stearns had $US18 billion in counterparty funding and within 24 hours it had none.
Macquarie needs to think about whether it should go beyond its current plans for providing information to the market and take the opportunity to remind the world how well placed it is to cope with the current dislocation in markets.
It is partly due to luck and partly due to good management that Macquarie finds itself in the strongest financial position in its history.
It was good management on behalf of former chief executive Alan Moss that his successor, Nick Moore, was handed a very conservative Macquarie balance sheet. But it was good luck that the changeover in management coincided with a restructure into a holding company structure that involved a major capital raising before the sub-prime crisis hit.
It raised $830 million in new equity through a placement and share purchase plan in May last year. It also completed a $650 million hybrid in June this year.
As a result of all that Macquarie has about $9.6 billion in regulatory capital, which is 40 per cent in excess of its minimum regulatory requirements. That translates to an excess capital position of about $3 billion.
About $1 billion in excess capital can be attributed to the holding company and about $2 billion to the bank.
Doubts were raised about Macquarie’s capital in late August when a UBS analyst said that the bank’s implied Tier 1 capital ratio of 6.9 per cent was too low. Instead, a Tier 1 level of 11 to 12 per cent was more appropriate which implied excess capital of only $150 million to $500 million.
Macquarie, however, says the analyst later admitted he had left out an amount of $700 million disclosed in a document produced by the bank. The analyst has not published a correction and UBS says the research has to speak for itself.
Macquarie is said to be facing difficulty with its short term funding requirements. But a closer look at its group funding suggests otherwise.
Macquarie has about $27 billion in term assets that is holding and it is funding them with $30 billion in liabilities that are longer than that. There is no mismatch there.
The bank has issued paper of $25 billion. About $6 billion of that are equity linked notes and other paper with terms of about two years. That leaves about $19 billion in wholesale short term funding that will have to be rolled over in the next 12 months.
Those concerned that Macquarie won’t be able to access wholesale markets to replace this funding should find comfort in the holdings of cash and liquids of $20.8 billion. It is possible Macquarie could have repaid its short term funding in cash yesterday.
In the four months to July, Macquarie raised about $6.4 billion in term funding. That means it now has about $9 billion in term funding to cover short-term assets if required.
The overall term funding position was helped by a $9 billion bank facility that was syndicated in August 2007. Only about half of that has been drawn with the remainder in cash.
Confusion over Macquarie’s funding position has not been helped by the way it has responded to adverse developments in the market or in the way it has sought to explain itself in disclosure documents.
A statement issued yesterday by the bank to clarify its funding lacked the clarity that the situation demanded. It was ambiguous because it left questions about short term financing hanging in the air.
There is an element of frustration within Macquarie about the reporting and public commentary surrounding the bank, particularly the comparisons with Wall St brokerages and, even worse, the comparison with Babcock & Brown.
As Brian Johnson at JP Morgan has pointed out, Macquarie’s business revolves around customer facilitation not trading of financial assets. Its business is as far away from Wall St investment banks as Sydney is from New York. The comparisons with Lehman Bros and Bear Stearns are simplistic because they ignore Macquarie’s $225 billion in assets under management.
But just as Bear, Lehman and Merrill had to decide whether to sit tight or do something to squash the rumour mongers and short sellers, Macquarie has to figure out a strategy to ensure it is not the next target.