Overview

Letter to Sydney Morning Herald in response to BusinessDay article on 31 May

02 June 2010

Michael Evans’ article of Monday May 31, BusinessDay, P1, "Return of the boys with Brazil" relies on the premise that Macquarie raised money cheaply under the Australian government guarantee and deployed it, to "rebuild the bank and its bonuses".

This premise, and the article itself, are misleading in a number of ways:

  • Macquarie did not use the government guarantee to "rebuild" itself and, as detailed in its public financial accounts, was in a sound and conservative financial position throughout 2008 and 2009, and remains so today.
  • Macquarie's loan assets in March 2007, before the market disruptions occurred, were $45.8 billion, in March 2008 (before the government guarantee was announced) they were $52.4 billion, in March 2009 they were $44.8 billion and in March 2010 they were $44.3 billion. This clearly demonstrates that there has been no major ramp up in overall lending activity.
  • Macquarie held at least $25 billion in cash throughout the market dislocations of 2008 and 2009, significantly in excess of that required, and as of its most recent reporting date of 31 March holds in excess of $20 billion.  
  • Not only have cash levels and loan assets remained relatively constant, total assets and total liabilities of the Group have also remained relatively constant. The Macquarie funded balance sheet at September 30, 2008 was $76.4b. At March 31, 2010, the funded balance sheet was relatively unchanged at $74.9b.
  • Rather than "fuelling banker bonuses" Macquarie's high levels of cash holdings had, and continue to have, a negative impact on profitability and accordingly on staff profit share.
  • The article suggests Australian taxpayers' AAA credit rating was used to make millions. The facts are that Macquarie pays 1% a year for all funding issued under the guarantee; that is approximately $200 million per year. Macquarie has not  issued new debt under guarantee since August 2009.
  • The business of the Corporate and Asset Finance (CAF) division of Macquarie is not a “reinvention” – it has been part of the organisation’s operations since the 1970s - the majority of financing by CAF has and continues to be to Australian clients. 
  • BusinessDay appears intent on singling out Macquarie on this issue when nearly every financial institution in the OECD (ex Japan), including 200 in Australia alone, could access government guarantees during 2008 and 2009. 
  • Inexplicably, BusinessDay has now made these claims more than a dozen times, ignoring all publicly available information that clearly refutes the claim. 

 

Greg Ward
Chief Financial Officer
Macquarie Group

 

FURTHER DETAIL

CLAIM: Macquarie says CAF contributed 10 per cent of Macquarie's $1 billion net profit. Its operating revenue contribution appears to be significantly higher.

FACT: CAF contributed 6.8 per cent of Macquarie’s total operating income and a smaller percentage of net profit after tax. This can be easily calculated from the full year accounts which have been publicly disclosed.

 

CLAIM: At a time when the bank faced the collapse of its "Macquarie model" of fee-generating listed infrastructure trusts, Brazil began spearheading a drive to reinvent the bank's profitability using a turbocharged commercial lending strategy that taxpayers have unwittingly supported.  The origins of CAF's rise lie at the height of the global financial crisis in September 2008.

FACT:  All specialised funds - listed & unlisted infrastructure, real estate and private equity - provided only 12% of group operating income in 2007, 19% in 2008, 14% in 2009 and 10% in 2010.  CAF has provided finance since 1970 and asset management solutions since mid 1990s to retail, corporate and government customers in 36 countries.

 

CLAIM: As BusinessDay revealed earlier this month, Macquarie undertook a lobbying effort with regulators and government as hedge funds mauled its share price, sparking a crisis of confidence.

FACT: Your article of 17 May 2010 “Revealed: MacBank’s code red to the government” did not reveal a lobbying effort by Macquarie; it only reported the subject line of a small number of email communications.  With regard to the Macquarie Group share price since the start of the GFC, the movement in the  Macquarie Group share price largely mirrored or outperformed the movement of share prices of financial institutions around the world as reflected in the MSCI World Diversified Financials Index. This is illustrated in the following chart:

CLAIM: Macquarie figured there was money to be made buying loan and leasing books below cost. … As borrowers still pay the same amount of interest on their loan, Macquarie's yield becomes much higher. … But Macquarie could also finance deals more cheaply and increase its margins even further. … There is also the potential for revaluing a rebound in the loan book's asset values as profit in the bank's profit-and-loss account.

FACT:  In a period of market dislocation, Macquarie continued to provide finance to clients.  This was a time when some foreign financial institutions either were not lending in or were withdrawing from the Australian market, including GMAC, which ceased originating retail and wholesale new business in Australia during 2008 and 2009. Macquarie was able to acquire these businesses and continue to support these customers. 

 

CLAIM: Given the decision of experienced industry players to get out of the market, Macquarie's investment reveals the bank's ongoing strong appetite for risk - even if it is ultimately underwritten by the Australian taxpayer.

FACT:  CAF operates under the stringent risk control framework it has always maintained and while its loan and asset book has increased, the quality of the book has remained consistent.
In general, Macquarie’s risk management principles have remained stable over 30 years and have served the organisation well over the course of the global financial crisis. Any suggestion Macquarie has a large appetite for risk is not supported by the facts, including the simple truth that Macquarie has remained profitable throughout its existence, including the recent market turmoil.

 

CLAIM: In a series of disclosures, Macquarie has detailed the rise of the CAF division, making limited commentary on its funding and profitability. / Macquarie places little emphasis on the effect of the business on the bank's overall profitability.

FACT: Macquarie provides extensive disclosures about all of its business divisions, CAF included, in annual reports (for Macquarie Group and Macquarie Bank), investor presentations, Management Discussion and Analysis and Pillar III filings. In addition, as noted elsewhere in the article, the head of CAF, presented at the Macquarie Operational Briefing in February this year, providing additional operational details about CAF which are not required to be disclosed.  In addition, as part of the normal rotation of Macquarie’s business heads at operational briefings, the head of CAF also presented to the market in September 2006.

 

CLAIM: In the midst of the crisis CAF bought a multibillion-dollar plane- leasing book from financial crisis victim AIG, $1.8 billion in European loans and a $500 million US information technology leasing business.

FACT: It was in fact on 14 April 2010 – when financial markets were in recovery - that Macquarie agreed to acquire an aircraft operating lease portfolio from International Lease Finance Corporation (ILFC), a subsidiary of American International Group, Inc. (AIG).