Wednesday, February 06, 2008

House Of Cards Tumbling

I have never been a fan of Macquarie Group from Australia. There is something inherently wrong with the business model. The company acquires lots of infrastructure related assets such as tolls and airports, repackage them and sells to investors for yield and capital appreciation. Trouble is the bulk of the buying is done in house with money pre-raised from investors. These are then packaged into separate funds under the umbrella of Macquarie - assets are shifted, sold for revaluation gains within the funds. At every level and every transaction there are annual fees, transaction fees, advisory fees, placement fees, profit sharing kickers. etc. Its a big fee charging machine. As long as the assets go up in value they can keep doing it, and to magnify returns they usually leverage up most of the funds. The simple strategy was that if you could borrow at 6% but the yield for the asset is 8% per year, they will gear up to enlarge returns. The credit bubble implosion is the prick they needed to bring down this house of cards. Shares in Macquarie Group fell more than 8.5 per cent today after Australia's biggest investment bank announced the impending retirement of chief executive Allan Moss.

Mr Moss, who led to bank to dizzying heights of success, leading the operation to be nicknamed `the millionaires factory', will leave the bank in May. Allan Moss has been front and centre and the market does not like surprises. Allan has been the poster boy for excess-CEO compensation, better known as the A$33 million-dollar-a-year man. By 3pm, Macquarie shares were down 6.5 per cent, tumbling A$5.73 to A$61.43, while the broader market was down 2.73 per cent.

His decision to stand down will come in yet another record year for profits at Macquarie which are expected to hit A$1.8 billion for its latest financial year, an increase of 23 per cent, the group said today in a dual announcement about its current performance and Mr Moss's retirement. The rise in Macquarie's earnings will deliver yet another huge tranche of bonuses for Mr Moss and his fellow senior executives which between them totalled around A$200 million last year. It is likely that Mr Moss could receive between A$36 million to A$38 million this year in his swansong year. He is also a significant individual shareholder in Macquarie with a stake worth A$25 million at today's prices.

Mr Moss will be replaced by the head of Macquarie's powerhouse investment banking division, Nicholas Moore, whose salary and bonuses came in just below that of his soon-to-be predecessor, at A$32.89 million. Mr Moore's division provides 50 per cent of the profits earnt by the group and is the biggest operation within the Macquarie empire which now straddles the US, Europe and Asia as well as Australia and the Pacific. Profits over that period have grown 30 times which has made Macquarie one of the country's Australia's most successful companies.
Macquarie's dominance of the local investment banking market and its swallowing of a whole tranche of different businesses in Australia and abroad - such as Sydney Airport, toll roads, water and energy providers - has not been without controvesy. Such purchases have often been followed by a hike in prices paid by customers as Macquarie has sought to squeeze more income from those companies to cover the prices paid by the bank and aid its own stellar profit growth. Last year, the shares almost touched A$100 each as equity markets broke through record levels. Macquarie is the top dog globally leveraging on the credit bubble and jumping on the bandwagon of inflating asset prices.

The house of cards has just started falling, from A$100 to A$60, I expect it to hit A$25 sometime this year as it should be the best example of credit mess unwinding.

1 comment:

The Great Game said...

Love him or loath him, Alan Moss is definitely not somebody to be ignored. After all, there aren't that many people around who can claim the same achivement as him. No surprise that Nazir looks up to him and Macquarie as a role model

Just my personal take, the growth thru the 'infra fund' model is still better than the growth thru the 'proprietary trading' model that most US investment banks pursued in the 90s, and early this decade. Arguably, infrastructure funds is a new asset class, just like REIT a couple of decade ago; and Macquarie deserve its success from pioneering in this area.

leverage and asset inflation are just part of the economy cycle that all will go thru

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