Now we’re not saying we feel sorry for the crew at Macquarie Bank, although it does seem that a few bum deals, and a bit of over-zealous leveraging on what might have seemed some perfectly respectable senior debt-linked funds, and suddenly, media commentators are predicting an Aussie-style Enron.In fact, we hear that Bethany Maclean, co-author of the definitive book on Enron and its problems, The Smartest Guys in the Room, is working on an investigative piece about Macquarie for Fortune magazine. James Kirby, editor of Eureka report, writes in The Age newspaper that Maclean and her close contact, Jim Chanos, who Kirby describes as “one of Wall Street’s extraordinary ‘shorting’ masters”, are both focusing on Macquarie right now:
Macquarie’s management reputation is based on a curious combination — managing director Allan Moss has the manner of a kindly professor and his underlings have the manners of permanently angry litigation lawyers. Twice in recent days the courtly Moss has been rolled out to utter words of reassurance.
“Moss has got the bank out of several troughs in the past. But in the past he didn’t have to deal with Jim Chanos and his chum Bethany McLean”, says Kirby.
Chanos made a fortune a few years ago from shorting Enron — the disgraced energy company. McLean made her name as co-author of a book about Enron, The Smartest Guys in the Room, which later became a movie. One of her best contacts on Enron was Chanos. It was what you might call a double act.
Now Chanos is back in the market — his big ‘short idea’ at the moment is Macquarie Bank. And Bethany McLean is researching an article for Fortune magazine on Macquarie.
What happens next? Though the MacBank troops might be arrogant, they’re also very smart. Last month Moss invited McLean for tea and cakes at the head office in Sydney. What did Machiavelli say … keep you friends close and your enemies closer?
Maybe Jim Chanos is about to lose a lot of money.
So, the final word on Mac Bank (for now): Last Friday we posted “All about Macquarie” featuring a seminal quote from Ivor Ries, head of research at Baillieu, an Australian broker, and for many years one of Australia’s leading financial columnists: “You really need a PhD in mathematics to understand how they generate their earnings. So whenever there is any kind of bad news, everyone just assumes the worst.”
He’s right on both counts.
For Macquarie-watchers (and we know you’re out there), here are links to two of the best recent articles on the ins and outs of Mac Bank – featuring some clear, easy-to-follow explanations of its financial alchemy.
The first, “Who’s Afraid of Macquarie Bank?” is by Gideon Haigh, an Australian journalist who specialises in business journalism and high quality cricket writing. It comes courtesy of The Monthly, a diverse and quirky journal.
Haigh quotes Steve Johnson, who used to work for Macquarie’s project finance team, and threw it all in to help run Intelligent Investor, a financial newsletter:
“I mean, Macquarie isn’t the next Enron. There are real assets there, real cash flows. It’s just that the assets don’t justify the valuations attributed to them.” And as for the success fees paid to independent experts: “It’s ridiculous,” says Johnson.
Haigh also makes the point in his article that “the risks attached to Macquarie aren’t only financial”:
It is not just another big company making a tonne of money; it is a company increasingly standing in for the state, and not just in Australia. Two of its biggest recent purchases have been British assets of the most public kind: the venerable utility Thames Water, acquired by a Macquarie-led syndicate last October for £8 billion, and the emergency-services communications network Airwave, for which £1.9 billion was paid in April. Thames looks like the bank’s gamest bet yet: massively profitable, but with pipes so decrepit that almost a third of the water that flows through them seeps into the ground. London’s mayor, Ken Livingstone, has derided it as “the unacceptable, unsustainable and irresponsible face of privatisation”.
The second article, by Chris Jefferis and Frank Stilwell, two academics at the University of Sydney, takes a – well, more academic, more left-wing and far more disapproving – approach to examining the way Mac Bank runs (and profits handsomely from) its mind-boggling array of infrastructure, real estate and other investment funds. It comes from the Journal of Australian Political Economy (click to download).
We’ll leave you with one of their key conclusions:
“The copying of the Macquarie Bank model by other institutions adds to these concerns, particularly because of the substantial fee income they cream off the economic surplus. The perception of the Macquarie bankers as ‘the smartest guys in the room’ is leading other institutions to follow suit: even Queensland property developers are now basing their
business models on Macquarie.
“What may ‘work’ for infrastructure (at least from a relatively stable yield perspective) could be more hazardous when applied to hotel and leisure industries, for example, with more inherent market uncertainties. It also intensifies the redistribution of
income from productive investment to those institutions applying high and multiple fees for the management of capital.”