smh article

link: http://business.smh.com.au/business/macbank-next-domino-to-go-20080828-446w.html

MacBank next domino to go?


Once Babcock & Brown had toppled it was only a matter of time before attention turned to the Millionaires Factory.

Sensing a structure diminished by its own leverage, conflicts and complexity, the short sellers had already piled in. A surprisingly negative analyst report from rival UBS gave it the kick the shorts were looking for.

All Macquarie's financial engineering imitators - through Babcock, Allco and MFS - have crashed and now the corporate success story of the decade is under pressure.

Could the mighty Macquarie - the deal-making phenomenon which bid for the London Stock Exchange one year and the national airline Qantas the next - be humbled? Not just yet.

Yes, its model is vulnerable and the stock price volatility will persist amid the tug-of-war between believers and disbelievers. In contrast to the rash of Macquarie mini-me mimickers however, this is a far more diverse, better capitalised, better managed and more cunning crew.

That the stock plunged 10% yesterday is simply recognition that, in this time of radically-reduced deal volumes, it had been overpriced and there was no compelling reason to pay up for it.

My instinct was to predict a bounce in the shares. After an initial drop of almost 4% to below $40 for the first time since late 2004 the shares have since recovered to be up as much as 3%, or $1.23, to $42.84.

Related parties

Still, the bank does have serious issues, not least the stultifying leverage in its underlying assets and satellites, and some fishy-looking asset sales to related parties in MIG, MAP and MCG.

The satellites are more susceptible than the Macquarie mothership and these deliver fees. We can get to this later.

First, there is a significant policy aspect to the bank's predicament: no visibility on short sales. A couple of months ago the ''shorts'' would have taken 25 days of daily turnover to cover their positions.

Unfortunately, there is no disclosure of share lending data on a daily basis which could give the market a decent idea of how big the short position is. Further, there should be daily disclosure of both the ``covered shorts'' and the ``naked'' shorts.

The RBA issued an excellent paper in May saying there was a need to register share lending data at the trade-capture stage, that is it needed to be coded in CHESS.

Off-market transactions need to be disclosed, although this idea is unlikely to glean much support from the ASX whose interest lies in promoting as much trading volume as possible. Another conflict from a profit-driven market regulator, another story.