More Bad News at Macquarie Group

The briefing given by Macquarie Group this week would have provided little comfort to investors in Macquarie Group or any of its satellites.

Macquarie Group provided guidance of $900 million in profit for the year ending 31 March 2009. That’s down from $1.8 billion for 2008.

While they may well report a profit in that range, I remain highly skeptical of that $900 million figure. I think they should be reporting a loss – yes, a loss.

Macquarie still refuses to write-down certain investments to realistic values and they continue to transact between various Macquarie entities (generating so called profits). These two things mean that the quality of the earnings reported are as poor as one could get and are simply not a reliable indicator of the true state of affairs at Macquarie Group.

In December I wrote a post questioning a number of things that seemed amiss to me (see the post here).

The bottom line is that the so called “Macquarie Model” was based on using high levels of leverage to generate temporary (if not somewhat illusory) profits during a cycle of significant asset price inflation. That’s it in a nutshell. That’s all that was ever going on with the real estate and infrastructure assets.

Macquarie employees pocketed half the profits generated each year even though subsequent events have shown the folly of the model, the very temporary nature of the profits and the devastating affect it’s had on long-term investors in Macquarie Group’s listed satellite entities.

Just think about that for a minute – the ultimate result for investors in these listed satellites was the near total destruction of their investment and yet Macquarie took large fees from these entities for their “professional” management – fees which went into the pockets of Macquarie staff and still remain there. It beggars belief. And they continue to take fees!

Macquarie Office unit holders have now forked out a reported $12 million in fees to Macquarie Group for a recent capital raising that would have been totally unnecessary had Macquarie Office maintained prudent debt levels.

Macquarie Group has two things to be very thankful to the Australian Government for: The ban on short selling of their stock (it would be trading at much lower levels if this was allowed) and secondly, the Government guarantee on deposits and debt.

It’s tragic that Governments around the world have been forced by circumstance into protecting millionaires (with tax payers’ funds) from facing the full consequences of their reckless behaviour. I believe that Obama’s salary cap is a move in the right direction.

The Australian guarantee on deposits is scheduled to be removed in October 2011 and if we are still in the same economic environment there will be a flight to quality, that is, billions will be pulled from any bank that has an S&P rating of less than “AA”. And that means Macquarie, all regional banks and all credit unions.

They will want to really hope that we’re still not in the same economic environment in October 2011, because the results may be very ugly (in the absence of an extension to the guarantee).

As I said in my original post:

There has been a loss of confidence and significant damage to reputation from the terrible results experienced by investors in Macquarie branded entities. That loss of reputation is not immediately quantifiable but it is nevertheless very real.

I also asked in my original post whether 3,000-4,000 staff would end up being retrenched. Macquarie this week admitted to firing more than 1,000 staff – have no doubts, it will increase.

While Macquarie Group will probably go on, it will be as a much diminished entity. The damage to reputation has been significant and that’s a serious problem for a company that requires the ongoing trust and goodwill of investors.