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from the age (online)

Macquarie must show it's crisis-proof


James Kirby
August 5, 2007

AUSTRALIA'S smartest bank \u2014 Macquarie \u2014 has a problem. In the blink of an eye the smartest guys in the room have become the smart-ass guys in the room and in a sharemarket experiencing a sudden bout of nervous exhaustion, that's a bad thing to be.

If you don't know Macquarie Bank, suffice to say that it's the bank where the top brass get paid like they used to be in the Beatles. It's also our biggest listed investment bank with profits based on fees, funds flow and the need for fair winds in global credit markets.

As fears over a US credit crisis spill across the market investment bank sector, stocks such as Macquarie, its little brother Babc.ck and Brown and its baby cousin MFS have been sold off sharply.

But the backlash against Macquarie has been acute. Last Friday's close of $73.60 is about 25 per cent lower than its high point this year when it almost scraped $100.

That's a mighty drop.

At face value, there is no good reason why the bank should fall so hard. There is no public evidence the bank has any material exposure to the US credit crisis.

Unlike its global rivals Goldman Sachs or Merrill Lynch it does not lend to hedge funds.

But quantitative factors such as lending levels and risk process don't hold a candle to qualitative factors such as management reputation when the poo hits the fan \u2026 and that's just what's happening now in investment banking.

Macquarie's management reputation is based on a curious combination \u2014 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.

Do we believe him? It's worth knowing that JPMorgan banking analyst Brian Johnson \u2014 despite his concerns about "arrogance"\u2014 reckons Macquarie could be worth up to $122 a share. Of course, that $122 is a "target" \u2014 the target will be reached only if Moss and his top brass at Macquarie can once more convince investors that the institution is crisis-proof.

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.

Jim Chanos is one of Wall Street's extraordinary "shorting" masters who makes money from falling share prices. Chanos made a fortune a few years ago from shorting Enron \u2014 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 \u2014 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 \u2026 keep you friends close and your enemies closer?

Maybe Jim Chanos is about to lose a lot of money.

James Kirby is editor of Eureka Report, an online publication financially backed by Carnegie Wylie and Company.