July 2007


Who’s afraid of Macquarie Bank?

By Gideon Haigh
Who’s afraid of Macquarie Bank?

One of Governor Lachlan Macquarie's silver 'holey dollars', 1813: the inspiration for the Macquarie Bank logo.

The story of the millionaire’s factory

The 2007 annual report of Macquarie Bank runs to 120 compendious pages, its uncompromising inkiness broken only by a few small photos, pie charts and graphs. The text is unsigned, and there is not a single image of anyone at the bank, even its managing director, Allan Moss. Curious: Macquarie Bank used to be known for attractive, even imaginative annual reports. There was one that had peepholes in the pages; another had arty metaphorical images that paralleled aspects of investment banking with other occupations. But Australia's most admired corporation does nothing without a reason. It's almost as though the more successful it becomes, the more it aspires to impersonal, monolithic status.

Then there's that name. Apple Computer recently relaunched itself as Apple, explaining that it had left behind old-fangled ‘computers'. The ‘bank' in Macquarie Bank seems almost as archaic. In the financial world, the organisation is neither fish nor fowl, exhibiting characteristics of investment bank, asset manager, buy-out house, private-equity arranger and hedge fund. Perhaps that is why the custom has become simply to enumerate the assets under its control - a cliché beloved of the news media that nonetheless conveys something about Macquarie's diversity and geographic spread. Airports, antennae, casinos, car parks, turnpikes, tunnels: whether in Canada, Korea, Britain, Belgium, Singapore, Spain, Taiwan or Tanzania, all come alike to Macquarie's sophisticated metrics and financial heft.

You are most likely to find Macquarie under your wheels. It has made its name as a long-term holder of big infrastructure assets, and its chief fame is in toll roads. Interests in a host of them - from the Chicago Skyway to Britain's M6 Tollway; from Highway 407 in southern Ontario to the Indiana Toll Road, the so-called Main Street of the Midwest - repose in the Macquarie Infrastructure Group, the oldest and biggest of the bank's 31 specialist infrastructure funds. But Macquarie is no captive of its past. Of its 10,000 staff, 500 are peripatetic dealmakers in worldwide pursuit of the next asset, the next target, the next income stream.

On 15 May, Macquarie announced a record annual profit of $1.4 billion: a 60% increase on the previous corresponding period. For the first time, too, more than half its income came from offshore, and it would have been higher but for the strength of the Australian dollar. It looked like the crossing of an earnings Rubicon. Allan Moss was anxious to assure Australians that Macquarie would keep its headquarters here, where 6500 of its personnel are based. But it sounded a little like an ambitious son assuring an elderly parent that he wouldn't lose touch. Nor is it surprising that the bank's admirers can scarce forbear to cheer. Macquarie is a success story - perhaps the Australian business success story of the past decade.

Macquarie opened in Sydney in 1969 as Hill Samuel Australia, an outstation of the tweedy UK merchant bank Hill Samuel. Foreign financiers were then swarming all over Sydney, enticed by the chimeric nickel boom. But Hill Samuel Australia was a stayer, cultivating a reputation for diligence, discretion and, above all, excellent connections. Two of its stalwarts, David Clarke, now Macquarie's chairman, and Mark Johnson, now its deputy chairman, joined from the pioneering merchant bank Darling & Co in 1971, where they had trained under the future World Bank president Jim Wolfensohn. They did their first deal for White River Industries, owned by a wealthy family whose scion had been their MBA classmate at Harvard: Nick Greiner.

Hill Samuel Australia was sometimes more entrepreneurial than it received credit for. It was the fearless sole underwriter in the float of Westfield Trust 25 years ago; it pulled together the intricate structure that made possible BHP's landmark acquisition of Utah International; it launched Australia's first cash-management trust, and the first approved deposit fund not to emanate from a life office. The bank's alumni are among the best and brightest of their generation: ACCC chairman Graeme Samuel, his Grant Samuel co-founder Ross Grant, ING Australia chairman Tony Berg, Allco Equity Partners chief executive Peter Yates, Bendigo Bank chairman Rob Johansen, Goldman Sachs JBWere's investment-banking éminence grise Alastair Lucas. The organisation, nonetheless, would probably have gone the way of all merchant-banking flesh had its executives not successfully detached themselves from the parent company and sought a trading-bank licence in 1985. Then, its after-tax profit was just $7 million, and it would have made a tasty morsel for an acquirer - a fate that befell Hill Samuel in the UK, which disappeared into the maw of Lloyds Bank.

What had been an old-fashioned merchant bank came to resemble more a freewheeling Wall Street investment bank, though Macquarie deployed its capital frugally, building businesses in corporate finance, treasury, property and funds management that did not overtax its balance sheet. Mind you, not until Macquarie's recent spurt of infrastructure-fuelled growth has it been other than mediocre as a manager of investment monies. "It [Macquarie's funds-management business] has always been the runt of the litter," observes John Sevior, the head of Australian equities at Perpetual Investments. "They've never grown funds management, especially on the equities side. They were market leaders in cash management. But until infrastructure, they'd had two or three cracks at it and never gotten anywhere."

This makes Macquarie's eminence that little bit more remarkable, as though the Egyptians embarked on the Pyramids having earlier been unable to assemble a piece of IKEA furniture. "Maybe their time horizon is too short for equities management," speculates Sevior. "Because in this business you can have long periods where your performance is ordinary and you have to be patient. After this company [Perpetual] had been in the business six or eight years, there was a big board meeting where they had to decide whether to continue, because it wasn't profitable. Twenty years later we have $25 billion under management. It takes time and real commitment." Who knows the reason? Perhaps not even Macquarie.

The making of the bank might be said to have begun in 1991, when Macquarie's project and structured-finance teams started advising Mission Energy, an arm of the Californian utility SCECorp, in its $1.7-billion acquisition of 51% of the Loy Yang B power station, Australia's biggest infrastructure transaction to date. Loy Yang B was a gruelling 15-month deal in the dog days of a scandal-wracked Labor government in Victoria; the signing ceremony alone took eight hours. After all that, too, Mission subsequently sold out: the station is now owned by International Power and Mitsui.

But Macquarie developed a taste for and an aptitude in handling big infrastructure assets, while its executive director, Nicholas Moore, also identified a secular shift. Governments were not just stinting on infrastructure but exiting what they had: there was money to be made in the shift of public-sector assets into private hands, and in the provision of amenities and facilities on behalf of the state. Over the last decade, this initial jeu d'esprit has evolved into the ‘Macquarie Model': the closest thing in Australian finance to a perpetual-motion machine.

The ‘Macquarie Model' is begun when the bank buys all or part of a business, whether it be road or bridge, airport or utility. After a period of ingestion, the investment is passed on to one or more of its specialist funds, crystallising a profit, usually modest. But these funds not only pay Macquarie for management; they also pay fees for advice, underwriting and refinancing, as well as bonuses for outperformance of market indicators. In conjunction with rapid growth, Macquarie's fee structure sometimes produces bizarre excesses: in the three years from June 2002, for example, the rake-off from the Macquarie Infrastructure Group was 54% of cash flow.

In theory, it would be possible for investors to find a cheaper manager. In practice, to unseat Macquarie from one of its funds is almost as inconceivable as Westfield Holdings being booted out of Westfield Trust. So it goes - and when you are clipping per cents off $131 billion of infrastructure assets, there is soon plenty to go round. As Scoop Jackson observed, "A billion here, a billion there, and pretty soon you're talking about real money."

Able to charge a premium to investors in its specialist funds in what has increasingly become a commodity business, Macquarie is a market leader - perhaps the market leader. Peter Doherty, of the asset-management research firm Capital Partners, argues that Macquarie is in effect already the world's largest asset manager, although the quantum of its funds is less than giants like Fidelity and State Street: "We estimate that a dollar in a specialist fund will earn more than ten times the management fee earned from a generalised fund." Doherty is an unstinting admirer. "I think Macquarie is going to be an enormous enterprise," he says.

In the past five or so years, Macquarie has also developed a capability in private equity: the business of privatising mature businesses and ratcheting up their returns with liberal applications of debt. Qantas, of course, has been its most recent target, even if the failure of the Airline Partners Australia bid provided a rare interruption of Macquarie's triumphal progress. Macquarie, however, is unlike most of its competitors at this fashionable end of the market.

Big private-equity firms like KKR and Blackstone extract their returns by instilling financial controls, breaking companies up and floating or flogging the constituent parts. In the ‘Macquarie model', a Macquarie fund is substituted in the last leg of this process. Since 1994, the organisation's funds have sold only eight assets, worth just over $10 billion, to unrelated parties - all, it should be said, at sizeable profits. The emphasis of Macquarie funds is on holding assets and providing big dividends - which suits the retail investors who have suddenly flocked to the organisation as never before - rather than selling assets for the outsized capital gains expected by most private-equity investors. It's a philosophy reminiscent of Gus Levy's immortal injunction to his partners at Goldman Sachs: "Be greedy, but long-term greedy." The Macquarie funds contain some oddities. The Toronto-listed Macquarie Power & Infrastructure Income Fund, for instance, proclaims its "emphasis on power infrastructure"; yet it also contains, almost whimsically, a 45% interest in a chain of retirement homes. But in general, given the speed of their emergence, they are impressively coherent.

Macquarie's rise, and its involvement in offers for companies as recognisable as Qantas and Alinta, has been accompanied by an increase in the organisation's visibility. An unelected elite making big money from handling what the public used to own: it's a target-rich environment, if ever there was. But it hasn't really worked out that way. Five years ago, the bank did indeed incur the ire of Alan Jones when it floated Macquarie Airports, a fund underpinned mainly by Sydney's own. When alarm about the price paid for Sydney Airport sent shares tumbling, Jones proclaimed Macquarie "geared to the eyeballs" and "in big trouble". In fact, Jones has seldom been more wrong, and coverage of Macquarie resumed its faintly star-struck quality.

The announcement of Macquarie's remuneration is a perennial of the news cycle, with Peter Costello ("It's hard to think that anybody would be worth that kind of salary") and John Howard ("If you asked me as a citizen do I think it's a lot of money? You bet I do") taking turns in stating the bleeding obvious. The generosity of the bank's executives towards themselves scaled new heights in the latest financial year, when they shared $209 million, three-quarters of that being trousered by half a dozen individuals: chairman Clarke, boss Moss, his dauphin Moore, investment banker Michael Carapiet, property chief Bill Moss and treasury chief Andrew Downe.

Yet the tone of these media reports is seldom hostile: in recent times, the tendency has even been to pre-empt criticism that is scarcely audible anyway. In the Sydney Morning Herald, Peter Hartcher called Macquarie's latest pay bonanza "not a failure of Australian values but a success of Australian internationalisation". Public debate about salaries was excellent, stated Matthew Stevens in the Australian, because "it helps to educate all of us of the necessity to pay the price for the talent that creates the wealth-machine which is Macquarie".

It was Finley Peter Dunne who entreated his brother journalists to "comfort the afflicted and afflict the comfortable"; these days, the default position seems to be to comfort the comfortable. Nor do apologists for Macquarie's compensation bother with messy stuff, like whether the rewards adequately differentiate between the provision of genuine value and hugely commodious market conditions, or the paradox of extracting so much short-term enrichment from an ostensible commitment to "the long view": they prefer solemn references to "performance" and airy gestures to "the global market".

Not everyone, though, is quite so smitten. And it may not be coincidence that when the ‘Macquarie model' recently came under serious scrutiny, it was from onlookers overseas who were having their first acquaintance with it.

At a symposium in San Francisco on 23 May, the veteran American investor Jim Chanos was asked if he had a ‘short' to recommend: that is, a stock whose price he felt would fall. Without hesitation or qualification, Chanos nominated Macquarie, which he claimed was paying too much for assets and using suspect valuation techniques.

Chanos, of course, has a vested interest in talking Macquarie down: it's how he makes money. He made his first pile 25 years ago betting against the stock price of a high-flying insurer, Baldwin United. His work was denounced the length of Wall Street, but Baldwin, a colossal fraud, had filed for bankruptcy within a year. In 1985, Chanos founded a hedge fund specialising in such investments: Kynikos Associates is named after a sect of ancient Greek philosophers who believed that the key to life was self-discipline and independent thought. He lived up to that creed when he began taking a major short position in Enron during November 2000, and spread the word at a now-legendary conference of short sellers called ‘Bears in Hibernation'. It was Chanos who prompted Fortune's Bethany McLean to begin the story ‘Is Enron Overpriced?' which first made investors think it might be. Chanos set an analyst on Macquarie in January - Steve Schurr, formerly an editor at the Wall Street Journal - who began making similar conjectures about Macquarie.

Chanos's remarks flushed out another critic. Edward Chancellor is a former partner of the merchant bank Lazards who now works for breakingviews, a subscriber-only financial-analysis group with headquarters in New York. The author of an excellent history of financial speculation, Devil Take the Hindmost (2000), Chancellor is writing a sequel about credit, and it was Macquarie's affinity for debt that pricked his interest. He, too, began researching Macquarie in January, wrestling with the overwhelming bulk of the company's statutory filings: for, while it tends to be taciturn with the media, Macquarie is positively effusive where reporting to the market is concerned.

Chancellor wasn't impressed. "Modern finance is notable for three negative features," he says. "Excessive fees, excessive leverage and excessive complexity. Macquarie seems to have these in more extraordinary degree than most." His 6000-word critique, ‘The Wizards of Oz', was circulated by breakingviews on 1 June; a condensed version, ‘Macquarie's Secret Recipe', appeared in the Wall Street Journal three days later. Interestingly, one of his central arguments is not that Macquarie acts too much like a private equity firm, but that it doesn't act like one enough:

... whatever you think about private equity, and I take a rather dim view of it, it has at least the discipline in the last resort of the sale process: the need to sell the asset profitably. Macquarie does not have the sale discipline. In fact it has retail investors who are prepared to accept a lower IRR [internal rate of return]. But because those lower conventional expectations allow Macquarie to pay more for assets than their competitor, what you get in their funds is lower returns and also higher risks ... If you do pay more for assets than anyone else, if you do load the assets up with debt, if you do take enormous fees and pay out huge dividends, how do you also revalue the asset periodically and say it is worth more? It just seems to defy the laws of financial physics.

Macquarie responded soberly. Nicholas Moore wrote to breakingviews and the Wall Street Journal standing by Macquarie's track record. Macquarie Investment Bank issued a three-page "fact sheet", disputing among other things an inference of Chancellor's paper that Macquarie was overly reliant on fees and transactions involving its funds.

It is worth distinguishing between the bank and its nebula of 31 satellites. The profits of Macquarie are real, and their sources are diverse; infrastructure is the start of any story about Macquarie, but by no means is it the end. Nonetheless, Chancellor raised some pertinent questions about the ‘Macquarie model', at least insofar as investors understand it.

Infrastructure: there could hardly be a more boring word in English. It is no mean feat to have made it sexy. Good luck and good management are at work. Firstly, market conditions for investing have been extraordinarily benign: a 14-year bull market, lots of liquidity and plenty of easy credit. Secondly, Macquarie has shown a remarkable facility for the jiggery pokery that investment professionals call ‘financial engineering'. The assets in Macquarie's funds may be dull; but they are, as Dr Johnson said of Thomas Grey, dull in a new way.

By any traditional method of valuation, Macquarie pays a lot of money for its assets; it often gears these assets highly too, in order to wring from them the steady and sizeable distributions to which investors have grown accustomed. But it quarantines the risk, and also optimises tax benefits, by managing its assets through the ownership of minority stakes in holding companies, and relying on big licks of non-recourse debt: debt that, in the event of default, won't destabilise other assets in the fund, or come back to bite Macquarie itself.

Macquarie justifies its tolerance of gearing by pointing out that the assets concerned usually have stable cash flows and high barriers to competition. But the structures are such that it isn't unknown, at least during periods of high capital expenditure, for dividends from funds to exceed cash flow, while the precise level of indebtedness is also sometimes far from obvious.

One perceptive observer of Macquarie's modus operandi comes from within its ranks. Steve Johnson worked for Moore's project-finance team in Sydney, Vienna and London, then three years ago swapped the life of a high-flying banker for that of a low-flying pundit, buying into a newsletter called the Intelligent Investor. Johnson holds Macquarie, and its appraisal of risk, in high esteem: "When I was there, the risk department was ruthless. They really wanted you to go out there and make money without taking any risk at all." But Johnson also harbours a distaste for infrastructure, which he contends has been over-promoted as "safe". He refers with particular scorn to the financial lexicon on the website of the Australian Stock Exchange: "Revenues from [infrastructure] assets are not considered volatile, and infrastructure is generally regarded as a stable asset class." Johnson says, "It's one of the most misleading documents I have read in my life."

The financial statements published by Macquarie funds aren't quite so misleading, he thinks; but nor are they exactly clear:

The numbers in MIG's accounts, for instance, are massively under the actual indebtedness. And the non-recourse nature of the debt is very important for people to understand. The idea is that if, say, the Indiana Toll Road goes bust, it has no effect on the 407 International. From an accounting perspective, their treatment is OK. If I buy shares in Telstra, I don't have to take on a proportion of their debt. But in the interests of disclosure, they should disclose as a note the actual amount of debt that's tied up in these things. They're not doing anything blatantly wrong, but they could make their accounts much easier to understand.

Like Chanos and Chancellor, Johnson is not enamoured of the financial models that Macquarie uses to value assets. These, he points out, are easily skewed by their underlying assumptions:

I just think the fundamental logic behind them is flawed. They're buying assets like the 407 International in Toronto where they're assuming it's going to grow by 5% for the next 99 years, then they're using a discount rate to bring that back of 7%. If you fiddle around with just those two variables, you get massive changes in valuation, because you've got money growing almost as fast as you're discounting it back. In theory those two things can't ever overlap, but Macquarie occasionally gets pretty close to it. That's how they get these quite extraordinary valuations. Maybe one day they'll come up with an infinity valuation, meaning they can just pay anything they like!

Jim Chanos and Edward Chancellor have been particularly critical of the proprietary nature of Macquarie's "black box" models: an emotive phrase, because it was applied to, and richly earned by, Enron. Chancellor also tut-tutted Macquarie's use of independent experts, homing in on the US$3.8 billion that Macquarie and its Spanish partner Cintra paid for the Indiana Toll Road in January 2006. Although it was US$1 billion more than the underbidder and 50 times its historic cash flow, this valuation was independently attested by Maunsell, a firm of Australian consulting engineers who have been providing services to Macquarie for more than a decade. Other consultants who reported on the Indiana deal have concluded Maunsell was overly optimistic; Chancellor himself also expressed disquiet at Macquarie's practice of paying the firm success fees. The practice certainly seems at odds with the Australian Securities and Investment Commission's Practice Note 42.12, which states: "An expert who is paid a success fee will not be considered independent."

Steve Johnson isn't as alarmed by Macquarie's models: while working there, in fact, he helped design some. But he says they do place unacknowledged demands on investors. "I think if you go into these things, you have to chuck the Macquarie valuation out the window. You go there, look at the assets, and work out what you think they're worth. Like you would with any other business on the stock exchange. And they provide you enough information to do that," he says. "I mean, Macquarie isn't the next Enron. There are real assets there, real cash flows. It's just that the assets don't justify the valuations attributed to them." As for the success fees paid to independent experts: "It's ridiculous."

There is no question of malfeasance here, or even of mischief. There is no omertà about the risk profile of Macquarie's funds, and some professional investors have already made their own adjustments. Perpetual Investments, for instance, won't touch them. "We can't own them, because we take an old school, traditional approach to gearing," says John Sevior, the company's head of Australian equities. "Although they pay high yields, the borrowings and financial engineering just don't meet our criteria - which has been costly for us, because their market performance has been phenomenal." Nor can it be argued that Macquarie does not provide enough information to investors: its reports are exhaustive. Which, perversely, may add to the risk, if one accepts the famous argument of the Nobel economics laureate Herbert Simon that "wealth of information" usually leads to "poverty of attention".

Chanos and Chancellor, then, may be both right and wrong: correct that the ‘Macquarie model' probably will be tested in the future; premature in concluding that Macquarie won't be able to make the adjustments necessary. As Sevior relates: "A competitor of Macquarie said to me recently, ‘Every time we think we've found a new niche, or a new product, we find that Macquarie have already been there for three or four years, and they already own the market.'"

"I think there's going to be a lot of pain," says Steve Johnson. "No doubt about that. I'm convinced interest rates are going to go up quite significantly, which will have a massive effect on all these highly geared investments. In the long-term, though, they have a model of employing very smart people and encouraging them to build business under Macquarie's roof." Nicholas Moore is right to stand on his firm's track record, although perhaps not so much the financial part as the evidence of a culture both innovative and adaptable.

The risks attached to Macquarie aren't only financial. It is not just another big company making a tonne of money; it is a company increasingly standing in for the state, and not just in Australia. Two of its biggest recent purchases have been British assets of the most public kind: the venerable utility Thames Water, acquired by a Macquarie-led syndicate last October for £8 billion, and the emergency-services communications network Airwave, for which £1.9 billion was paid in April. Thames looks like the bank's gamest bet yet: massively profitable, but with pipes so decrepit that almost a third of the water that flows through them seeps into the ground. London's mayor, Ken Livingstone, has derided it as "the unacceptable, unsustainable and irresponsible face of privatisation".

In the public eye, Macquarie can look squeamish. Stan Correy from Background Briefing describes attending a financial industry conference to hear Nicholas Moore speak. When Moore heard that the ABC was present, he demanded that recording equipment be switched off. "I was just reading that Macquarie is investing in regional newspapers in the US," Correy says. "Which has got to be ironic, considering they absolutely hate journalists writing anything about them."

Its reputation, moreover, is for being prickly, even hostile, when criticised. When Business Review Weekly was preparing a cover story on Macquarie three years ago, the bank started issuing complaints to the magazine's proprietor, John Fairfax Group, even before publication. Two years ago, transport academic Dr John Goldberg published a paper casting doubt on the viability of the M2 Motorway and the Lane Cove and Cross City tunnels; the bank not only complained to the University of Sydney, where he was an honorary associate, but demanded the university disassociate itself from his comments. Whatever the rights and wrongs of Goldberg's critique, it seemed needlessly heavy-handed. Likewise the response to the Wilson HTM analyst Brett Le Mesurier, who was told recently that he was being denied access to management because he had had the temerity to write a note to clients comparing Macquarie to its smaller rival Babcock & Brown. "Of course," says the puckish Le Mesurier, "that just encourages me."

An investment bank undertaking roles previously performed by  government is anything but a like-for-like swap. A government is elected on the basis of what it may giveth; an investment bank is chiefly interested in what it can taketh away. A recent reminder of the sparks struck by the clash of cultures is instructive. On 28 May, Liverpool City Council announced, very quietly, that it had reached a settlement with Macquarie over five development agreements involving council land: resolving a moribund arrangement colloquially known as the Oasis Project, Macquarie accepted $600,000 to walk away. Outside the locality, the name Oasis will pass mostly unrecognised. Few local-government fiascos, however, have been so abject and costly.

In February 2001, the council, the Canterbury Bulldogs and Macquarie signed a commercial agreement to develop a "world-class sporting, entertainment, cultural, educational and recreation precinct" around Woodward Park. For all manner of reasons - some of them colourful, to use a standard Sydney euphemism - the work barely proceeded beyond the pouring of a concrete slab, by which time $15 million of council funds had been expended and Macquarie had pulled out.

The council pressed on with a revised vision of the plan excluding the Bulldogs. But ‘Liverpool 2020', involving Macquarie as exclusive adviser and arranger, was driven mainly - according to a subsequent inquiry chaired by Emeritus Professor Maurice Daly - by the "perceived need to ... restore public faith in the council". Inevitably, it did the very opposite. The bewilderingly one-sided memorandum of understanding gave Macquarie sweeping powers over council land for residential development, yet did not even oblige it to share its financial modelling of the project with councillors.

Macquarie's property chief, Bill Moss, testified at the inquiry that "we wanted council to do its own feasibility and its own independent parties to sign off on their own model," and also that "we believed that if we gave council a hard copy of our model it would be on the front page of the newspaper the next day". Professor Daly was unimpressed, deciding that Macquarie was "motivated solely by self-interest", while the councillors were "captive to the reputations and experience of the parties with whom they were attempting to establish commercial relationships". He concluded: "The most generous summary of Macquarie's actions is to call them opportunistic. A more appropriate view might be that they were predatory."

This isn't the place to review Daly's findings, or to revisit in detail a convoluted and tawdry case. What is perhaps most interesting about the inquiry is that, as Professor Daly notes, "The financial press basically ignored it." Daly's judgement sounds damning to a lay reader. But in the Darwinian world of finance, to be opportunistic, even to be predatory, might almost be a recommendation; the naive and under-prepared are to be exploited. The question that follows forms itself: Does this also apply when the naive and under-prepared are citizens to whom, thanks to the withdrawal of the state, a company is now providing a service - a service they used to take for granted, regarding it as a function of their tax dollars or council rates?

Complex financial structures are Macquarie's speciality. But what about complex social structures? "The powers that be at Macquarie, I'm sure, will have thought about this sort of stuff," says Steve Johnson of the Intelligent Investor. "But the people running around doing the deals, they just want to get the deal done and generate some fees. They won't have given a lot of thought to the bank's role in society." In fact, it would be easy for Macquarie to become mighty unpopular. The public sector might well have been riddled with inefficiencies, but at least you never suffered the galling thought of the people running it being paid tens of millions of dollars.

Time will tell how people deal with that notion now, and how Macquarie will deal with the response. Peter Doherty from Capital Partners thinks the company is up to it: "The lessons they learned after the Sydney Airport acquisition stung them badly. The share price went from $42 to $18. They learned that their interface with the public is important. It's not just about transactions; it's about image. I don't know whether they'll make that mistake again. They tend not to repeat mistakes."

On the other hand, Doherty, a staunch defender of Macquarie's levels of remuneration, also looks forward to its executives being paid far more: "Those packages are going way north. They are going to be very high." Macquarie's evolution from "fee-for-service to having a stake in the game", he argues, is analogous to comparing JP Morgan and John Rockefeller: where Morgan the adviser became very rich, Rockefeller the principal became stupendously rich. Yet perhaps only by the standards of modern hypercapitalism could JP Morgan be regarded as a relative failure, when his fortune would today have made him at least a billionaire, and Rockefeller be offered as an exemplar, when his widely hated empire was broken up by anti-trust authorities.

In this sense, the failure of the Airline Partners of Australia bid for Qantas may be a felix culpa. For one thing, taking a conservatively managed airline and turning it into a highly geared one looked to be asking for trouble. (Warren Buffett issued some sage advice after losing a bundle on preferred stock in US Air 18 years ago: "I have an 800 number now which I call if I ever get the urge to buy an airline stock. I say, ‘My name is Warren, I'm an air-aholic.' And they talk me down.") For another, the APA plan for Qantas smacked of turning a well-loved Australian institution into a fee-machine, with the upside enjoyed by Macquarie and its co-investors and the downside faced by the airline's employees. Steve Johnson explains: "I think it's a situation where the employees are well within their rights to say: ‘We've earned all these entitlements in a quite secure business, and now you're going to make it very insecure. If you go bust we lose what we've worked for.'"

In the past decade Macquarie has been one of the great stories of Australian business. In the next decade it will surely be one of the most intriguing. How ready is Macquarie for the consequences of owning businesses on which citizens vitally depend? And how ready are citizens to depend upon Macquarie? While what Macquarie Bank ends up being called is of only minor significance, the tone with which people say its name may matter a lot.

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