even the most bearish are reporting a profit, page-83

"I think on Tuesday MQG cannot afford to disappoint with earnings"

I think we are looking at anything better than $600m for the mid term on tuesday arent we.

on the way to a full year of $1.06bn

I haven't got time to summarise but here is what the best bank analyst has to say about debt.

GREG HOY, PRESENTER: Caught in the undercurrent of the credit crisis, Macquarie Group's share price plunged to its worst close in 5 years on Thursday before rebounding significantly Friday.

It seems the hedge funds were up to mischief short selling, but there are a significant number in the market who still question the sustainability of the Macquarie model.

With the bank not talking to the media this week I spoke to long time Macquarie supporter, JP Morgan's banking analyst Brian Johnson.

(to Brian Johnson) Brian, as an analyst you have always been a big supporter of Macquarie Bank, can we test your faith? I mean, surely the valuation of assets in their unlisted funds have deteriorated considerably in this uncertain environment. Would you concede that?

BRIAN JOHNSON, BANKING ANALYST, JP MORGAN: That's correct. Asset values generally have deteriorated but what the market seems to be missing or certainly some people seem to be missing is that Macquarie Bank's model has evolved beyond the listed funds into now what I’d call the unlisted model. And Greg, the thing about it is in the listed world it was a great model to work when basically debt markets were easy because you could continually regear the assets to create distributions that people thought were dividends. That's become somewhat more difficult now. So what's happened now, I think the model's evolved now to the unlisted space where you raise money, lock in the cost of debt and the investors there are only worried about the terminal value of the asset. They're not particularly interested in the distributions along the way and it's just a fundamentally more robust model.

GREG HOY: But isn't that precisely the problem for investors with these opaque funds, that they only really get to know the value of the assets when Macquarie tried to sell them?

BRIAN JOHNSON: Well it depends. In the listed world, I think most people have been basically buying these funds for those distribution streams that have been coming out, but if you have a look at it, what we've actually seen of late is some shuffling of the assets around Macquarie Bank funds, but there's one really overriding trend, which is that Macquarie Bank have been selling from the listed funds into the unlisted funds at premiums to the book values. So it's quite significant that you know, it's not Macquarie Bank that are buying those assets, it's funds that are controlled by Macquarie Bank but presumably where there's an independent, there's a degree of independency on the investment committees that have ratified those asset values.

GREG HOY: But the problem for investors still is in transparency, isn't it, though? It really is hard to tell if these assets are impaired or not?

BRIAN JOHNSON: Exactly. But Greg you know the great thing about it is neither you nor I nor any retail investor owns those assets and knows about them. The fact is that because these are unlisted funds controlled by basically wholesale investors, presumably you don't have to worry about continuous disclosure requirements you'd see in a listed fund, and I feel confident in telling you that probably those investors in the unlisted funds probably have more of a dialogue about what's happening on those assets than you would actually get in the listed world.

GREG HOY: Are you sure that they enjoy such confidence though, it's said for example that the unpublished fees in the unlisted funds are even greater than the famous fees for the listed funds. I mean, how long in such an environment will investors continue to support such a model?

BRIAN JOHNSON: Greg, right now the unlisted funds have got $10 billion of cash to invest that's been raised recently - these are wholesale pension fund investors and presumably they would not give money for Macquarie Bank to manage in the unlisted funds unless they were confident in Macquarie Bank's methodology for basically managing and valuing those assets.

This is not Mum and Dad buying these unlisted funds, these are wholesale pension funds that presumably are quite sophisticated. But the fact is, is when you ask how long can it continue - they've recently given Macquarie Bank in this unlisted world, in the unlisted world in basically infrastructure and property there is $10 billion of cash to invest there right now.

GREG HOY: But with these so called independent or arbitrary valuations that are placed on these assets by Macquarie, wouldn't these assets be cheaper now in listed funds?

BRIAN JOHNSON: Greg, it all comes down to what you've actually done on the debt. I can't tell you asset by asset the valuation but what I can tell you is what everyone focuses on when interest rates rise the value of assets falls, and that's correct - but if you have a fixed rate of funding locked in, then the value of the liability has probably also fallen at a commensurate rate.

So you've got to be careful. There's no doubt about it - asset values have fallen and that's a risk that you take when you invest in anything. I believe we're at the beginning of the infrastructure cycle rather than the end. I think governments will be selling infrastructure for decades. And of you have a look at it, Macquarie Bank have got funds that are established in the unlisted world, they've actually got the cash to do it and they probably don't have too many competitors to actually buy those assets, and Greg, that probably means they can buy those assets quite cheaply as they come up. But there's no doubt about it - it is a challenging environment at the present time

GREG HOY: Well another grumble doing the rounds is that you only really discover things that they've borrowed heavily to take out private equity like interest in, like for example Dyno Nobel or the South African drilling company Bort Longie (phonetic), only disclosed once Macquarie tries to list them in an IPO. I mean, how many more of those are there out there, there must be more in the pipeline, we'd assume?

BRIAN JOHNSON: Greg, the fact is that one of the real skills I think that's actually differentiated Macquarie perhaps from some of the competitors that have really struggled is that in Macquarie Bank's case there is some discipline in actually the process by which they bid for assets. You know, they don't go and bid for an asset until they've got the debt underwriting locked in, until they've got the equity underwriting locked in and also when they actually bid for these assets they do it on a non recourse basis.

GREG HOY: But the bottom line surely for Macquarie is that they have always relied on velocity of market transactions, surely they have lost that now, and their ability to make money must have diminished?

BRIAN JOHNSON: You know, this thing about Macquarie Bank, they've always done something, that's actually incorrect. Macquarie Bank, the skill that you are actually buying with the management team is their ability to pick businesses and invest in them, and that's the wonderful thing about the stock market at the moment. The net tangible asset backing at Macquarie Bank is about $29 a share, the net asset baking is about $32. You are not paying anything for that management team.

GREG HOY: OK, but what about the volume of market transactions? Surely that's dropped off, and surely that must be a problem for the bank?

BRIAN JOHNSON: Greg, quite correctly, everyone is saying Brian used to tell us this stock is worth over a hundred dollars a share. Greg, the world has changed. We don't have a share price target over a hundred dollars. And in fact I find it kind of galling that people don't listen to what we actually are saying - if it is even important what we're saying. But what we've been saying is that Macquarie Bank will trade in a range. When we look at it in this environment, the best you know if it was re-rated up and everything was going swimmingly well and the market loved Macquarie, I reckon it would trade up to round the $66 to $70 level.

When things are bad - we've just seen the share price, how low it can get and it will oscillate between the two. Equity markets now are so incredibly volatile, it is so much more volatile than it has been in the past, and really telling you where the share price will be on any stock now is a day to day proposition.

GREG HOY: OK, we'll leave it there Brian Johnson, great to have your thoughts, thanks very much for joining us.

BRIAN JOHNSON: Thank you.