It appears that Macquarie Bank directors have short memories — barely a year since the credit crunch caused turmoil in financial markets, money again is being spread around the executive suite at Martin Place with gay abandon. As Macquarie’s net profit result leapt back above $1 billion (largely courtesy of several satellite funds chipping in more than $400 million to escape the shackles of the Millionaire’s Factory), chief executive Nicholas Moore and other senior executives saw their remuneration rocket.

Moore, the architect of the once highly profitable but now widely discredited “Macquarie model” took home short-term benefits (predominantly cash) of $5.2 million, including a short-term bonus that skyrocketed from $2.1 million in 2009 to $4.7 million this year. While Moore’s base pay is relatively low, his cash remuneration remains higher than the 2009 cash pay of Gail Kelly at Westpac and (former NAB CEO) John Stewart.

Despite an improved long-term remuneration structure, other than founder or departed CEOs, Moore’s total pay of $9.6 million trailed only Mike Smith (ANZ), Marius Kloppers (BHP Billiton) and Wal King (Leighton).

Moore wasn’t the only Macquarie executive to witness his pay appreciate substantially in 2010. Macquarie Capital head Michael Carepiet collected $7.3 million, up from $1.2 million in 2009. Macquarie Capital’s strong earnings improvement largely came about due to payments of more than $525 million in “break fees” from managed funds including Macquarie Airports, Macquarie Media and MIG. Fixed income chief Andrew Downe, whose division benefited from massive government stimulus in housing markets and buoyant trading conditions, saw his remuneration jump from $3.7 million to $7.3 million. Downe received cash pay of $4.5 million, cushioning from any adverse effects of a subsequent downturn in Macquarie’s performance.

But while payments to Macquarie bosses rose sharply, shareholders who have owned Macquarie since 2005 have not seen the fruits of the alleged improved performance. The key return-on-equity metric for Macquarie remains at only 10% — during the boom years of the Macquarie model, the bank achieved return on equity of 29.8% (2005) and 28.1% (2007). Importantly, the key earnings-per-share figure was $3.20 during 2010, well down from the $6.70 per share earnings result achieved by Macquarie in 2008.

In fact, since 2005, while shareholders have received about $14 per share in dividends, the share price has remained virtually static, that means Macquarie shareholders received a compounding annual return on their investment of about 5.3%, not far off the return achieved in a bank term deposit.

While Macquarie was delivering bond-type returns with far greater risk since 2005, Nick Moore (as head of investment banking and then CEO) received cash pay of $66 million as well as long-term incentive payments (excluding profit share) of $12.5 million. Carapiet, who was Moore’s understudy and his replacement as banking chief, was paid cash of $48 million since 2005 and millions more in equity incentives.

Despite Macquarie’s claims that it bases the majority of executive payments on net profit after tax and return on equity, in 2010, Macquarie’s ROE remained virtually stagnant (although this is largely self-imposed, as Macquarie maintained “far more conservative liquidity management”), and net profits rose largely on the basis of “one-off” internalisation fees. Despite this, Moore saw his short-term bonus double.

A passive investment in virtually every other asset class (be it property, bonds, cash or a share index fund) would have out-performed Macquarie since 2005. Since that time, Macquarie’s key management personal were paid more than $500 million.

It appears that Macquarie’s claim that its “remuneration strategy is designed to ensure our people are focused on generating outstanding shareholder value over the long-term and are rewarded in line with the outcomes they achieve” is not entirely accurate.

It appears that Macquarie Bank directors have short memories – barely a year since the credit crunch caused turmoil in financial markets, money is once again being spread around the executive suite at Martin Place with gay abandon. As Macquarie’s net profit result leapt back above $1 billion (largely courtesy of several satellite funds chipping in more than $400 million to escape the shackles of the Millionaire’s Factory), chief executive Nicholas Moore, and other senior executives saw their remuneration rocket.

Moore, the architect of the once highly profitable but now widely discredited ‘Macquarie Model’ took home short-term benefits (predominantly cash) of $5.2 million, including a short-term bonus which skyrocketed from $2.1 million in 2009 to $4.7 million this year. While Moore’s ‘base pay’ is relatively low, his cash remuneration remains higher than the 2009 cash pay of Gail Kelly at Westpac and (former NAB CEO) John Stewart.

Despite an improved long-term remuneration structure, other than founder or departed CEOs, Moore’s total pay of $9.6 million trailed only Mike Smith (ANZ), Marius Kloppers (BHP Billiton) and Wal King (Leighton).

Moore wasn’t the only Macquarie executive to witness his pay appreciate substantially in 2010. Macquarie Capital head, Michael Carepiet, collected $7.3 million, up from $1.2 million in 2009. Macquarie Capital’s strong earnings improvement largely came about due to payments of more than $525 million in ‘break fees’ from managed funds including Macquarie Airports, Macquarie Media and MIG. Fixed income chief, Andrew Downe, whose division benefited from massive government stimulus in housing markets and buoyant trading conditions saw his remuneration jump from $3.7 million to $7.3 million. Downe received cash pay of $4.5 million, cushioning from any adverse effects of a subsequent downturn in Macquarie’s performance.

But while payments to Macquarie bosses rose sharply, shareholders who have owned Macquarie since 2005 have not seen the fruits of the alleged improved performance. The key return-on-equity metric for Macquarie remains at only 10 percent – during the boom years of the Macquarie model, the bank achieved return on equity of 29.8 percent (2005) and 28.1 percent (2007). Importantly, the key earnings-per-share figure was $3.20 during 2010, well down from the $6.70 per share earnings result achieved by Macquarie in 2008.

In fact, since 2005, while shareholders have received around $14 per share in dividends, the share price has remained virtually static, that means Macquarie shareholders received a compounding annual return on their investment of around 5.3 percent, not far off the return achieved in a bank term deposit.

While Macquarie was delivering bond-type returns with far greater risk since 2005, Nick Moore (as head of investment banking and then CEO) received cash pay of $66 million as well as long-term incentive payments (excluding profit share) of $12.5 million. Carapiet, who was Moore’s understudy and his replacement as banking chief, was paid cash of $48 million since 2005 and millions more in equity incentives.

Despite Macquarie’s claims that it bases the majority of executive payments on net profit after tax and return on equity, in 2010, Macquarie’s ROE remained virtually stagnant (although this is largely self-imposed, as Macquarie maintained “far more conservative liquidity management”), and net profits rose largely on the basis of ‘one-off’ internalization fees. Despite this, Moore saw his short-term bonus double.

A passive investment in virtually every other asset class (be it property, bonds, cash or a share index fund) would have out-performed Macquarie since 2005. Since that time, Macquarie’s key management personal were paid more than $500 million.

It appears that Macquarie’s claim that its “remuneration strategy is designed to ensure our people are focused on generating outstanding shareholder value over the long-term and are rewarded in line with the outcomes they achieve” is not entirely accurate.

Meanwhile, here’s a run-down of just how the  MacBank makes its money?

Analysts, commentators and the share market last week gave Macquarie Bank a big tick for its recent earnings results, with the company’s share price leaping 4% on Friday after the announcement. Macquarie’s earnings rose by 20% (to $1.05 billion) while its return on equity rose slightly (off a very low base) to 10%. Macquarie even paid some tax this year, albeit at a rate of 15.5%.

But while many were quick to praise Macquarie’s performance, with the death of the Macquarie model of charging extraordinary fees to its captive managed satellites, a fair question can be asked — exactly how does Macquarie now make its money? And has Macquarie evolved from the company that renowned hedge fund manager Jim Chanos claimed was the world’s “best short”?

In the past year Macquarie has become far more geographically diversified — following a spate of acquisitions in the US, Canada and Europe, the bank has truly become a global institution, employing 7300 of its 14,600 staff outside Australia. Macquarie’s North American business was the main driver, with operating income increasing from under $400 million to almost $1.4 billion in 2010.

However, looking more closely at Macquarie’s operating five major profit-spinning divisions, the picture, and possibility of rapid future profit growth does not appear especially strong. Excluding the loss-making real estate division, Macquarie is split into:

  • Macquarie Securities Group, which generated income of $580 million. This is Macquarie’s broker division, providing equity research and trading services for institutions. The profitability of this group is correlated with share market activity — strongly rebounding global markets helped MSG more than double income last year;
  • Macquarie Capital. which earned $657 million. This section of Macquarie advises large companies on debt and equity raisings. As companies scrambled to raise equity in 2009, Macquarie made millions from placing capital to its clients. A large reason for the spate of equity raisings was the result of companies over-leveraging during the 2000s, partially, due to flawed financial advice from advisers such as (but certainly not only) Macquarie.

While Macquarie Capital earned revenue from advising “outside” clients, a substantial amount of its income was received through the one-off “internalisation” of satellite funds such as Macquarie Airports (which paid Macquarie $346 million) and Macquarie Infrastructure Group. In total, close to $500 million was “earned” through these one-off payments. Not only will these “ransoms” not be repeated, but Macquarie will suffer a loss of regular fee income as those three satellites stop paying annual management fees and lucrative advisory fees. (For example, MAp had paid the Macquarie mother ship $144 million in fees in 2007 and $148 million in 2008 — from now, Macquarie will receive no management fee from MAp).

  • Fixed income, currencies and commodities, which generated $827 million, the largest contributor to total profit. This division undertakes all sorts of complicated financial transactions for clients, including the “trading of and investing in corporate debt securities, credit default swaps, syndicated bank loans, collateralised debt obligations, asset-backed/mortgage based securities and derivatives of these products”. This sector has been spurred by record low global interest rates and an abundance of liquidity, as the US and Australian governments continue to prop up their residential housing sector through stimulus. As Goldman Sachs is discovering, there are risks associated with dealing in this sector.

The commodities section, which was responsible for more than half of the trading group’s income benefited from the China’s insatiable demand for commodity products.

This area of the bank was able to benefit from Macquarie sourcing cheap capital by relying on the Australian government’s AAA funding guarantee. Macquarie shareholders, and especially its executives, should be sending Kevin Rudd and Wayne Swan an especially large Christmas hamper.

  • Banking and financial services earned $261 million and represents a more traditional banking product — providing banking and wealth management services to retail (also known as “mum and dad” investors). While it sells less complicated products than Macquarie’s other groups, the banking group is very much dependant on market conditions (the group lost $99 million in 2008-09 as the share market slumped)
  • Corporate and asset finance group earned $264 million. This part of Macquarie arranges leases for things such as aircraft (similar to what Allco and Babcock & Brown originally did) and provides credit to car dealers. Macquarie spent about $1 billion acquiring Ford’s leasing business (and announced it was also acquiring GMAC’s Australian leasing book), in that sense, the bank also benefited from government stimulus to the car industry.

While income leapt above the $1 billion mark, the more important (but often forgotten) “earnings per share” figure remained static, largely because Macquarie’s weighted number of shares on issue rose from 281 million to 328 million during the year as it rose fresh equity (largely at about $27 per share, substantially diluting shareholders). While Macquarie’s income notionally rose, commentators forgot to mention (or didn’t bother to look) that the while the pie was bigger, there were more shareholders lining up for a piece.

Not only did Macquarie’s income per share not really increase, but it benefited from “one time” break fee payments and management fees, which will no longer be paid. For example, by looking at MAp’s annual report, one can determine that in 2009, on top of the $345 million lump sum to internalise management, MAp also paid Macquarie “base and performance” fees of $26.7 million. Over at Macquarie Infrastructure, the mother ship was paid fees of $46.3 million for management (as well as $100 odd million to give up management of Intoll, the “good part” of MIG). The MAp, MMG and most of MIG’s fees from will not be repeated and served to inflate Macquarie’s current year’s earnings.

There was some good news for shareholders, for it appears that the group has cut down on lavish in-house spending — despite several thousand more employees being hired, “travel and entertainment” expenses fell from $204 million to $160 million in an usual exhibition of restraint.

While Macquarie may have won over analysis and some commentators, without a massive boost from “one-off” internalisation payments, the benefit of relying on the government’s funding guarantee and buoyant market conditions the result would have been a lot worse. This, of course, is not news to Moore and Macquarie’s executive team, who, while noting that he expected operating results to improve in 2011, warned that sovereign debt issues in Europe may harm Macquarie’s future growth prospects.

Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed, features the full story of ABC Learning Centres, Babcock & Brown, Allco, MFS, Asciano, Toll, Village Roadshow, Timbercorp and Great Southern Plantations.


Peter Fray

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