Macquarie Bank & It's Products and how this affects you

A few of our clients have expressed concern re their cash being in Macquarie products – CMT, Term Deposits, Cash XL, or even their investments in Macquarie Wrap platform administration.

This is understandable considering the extraordinary and unprecedented market developments over the past year and in particular more recently this week (Bear Stearns, Fannie & Freddie, Lehman Brothers, Merrill Lynch, AIG, HBOS, etc), as well as the performance of Macquarie Group Ltd shares in particular and associated press reports.

We share your concern.

To this end we have focussed on ensuring that your investments are as prudently invested as possible.

We are doing what research and due diligence that we can to provide you with as much surety as we can.

If you are concerned – please ring your adviser at Parkside to discuss.

Australian banking system

As a point to commence, the Australian banking system is much stronger due to greater regulatory control, than that of the USA.

Australian ‘Deposit taking Institutions’ or ‘ADI’ (ie, banks) fall under very stringent regulatory requirements so as to ensure that your funds are protected. The Banking Act requires that any ADI has sufficient funds to meet depositor calls. As well if any ADI becomes unable to meet its obligations or suspends payment, the assets of the ADI in Australia are to be available to meet that ADI’s deposit liabilities in Australia in priority to all other liabilities.

Flight to safety

This is now the second phase of the ‘credit crunch’. Liquidity (the availability to cash or loans) has again dried up, and funding costs have risen.

The financial landscape in the US has changed significantly since last week. The Fed’s shock decision not to save Lehman Brothers has redrawn the battle lines. Whilst AIG was in the end “too big to fail”, the conviction that can be placed on that term has greatly diminished for the next one. How much more money has the US Government got? Within the space of 9 days we have had government bailouts of

Freddie, Fannie and AIG, three huge institutions with combined balance sheets of around US$3trillion; Lehman’s bankruptcy; the quickest takeover on record in Bank of America’s acquisition of Merrill Lynch; Ford, General Motors and the US Auto industry asking for US$50b in assistance to save the auto industry; numerous other banks on the brink of collapse if a saviour can’t be found, particular Washington Mutual (which may be in talks with JP Morgan); consolidation and bankruptcy of global airlines; and massive volatility across all markets. In times like these the recommendation is “safety first” or “flight to quality.”

Cash deposits with highly secure banks, government/semi-government bonds, supra-national bonds or high quality bank and corporate bonds are the best places to “hide” while these issues play out.

There is a massive ‘flight to safety’ going on – the ‘greed’ of the past has now turned to ‘fear’ of the present – the unknown. Gold (up 9% last night), oil, Government bonds and treasury notes, coveting the highest level of security available for funds.

Rumours

The current environment is one where rumours quickly spread and lead to failures and investors are not prepared to wait and see, where denials are seen as admissions, access to capital has dried up, and surprises are met with extreme and unforgiving volatility (any wonder Merrill Lynch and HBOS had to do something).

Market reaction

The share market has now wiped out half of the ‘bull run’ gains of the previous 5 years. It is down 20-30% of its high at the end of October 2007.

Financial stocks have suffered the worst.

3 month Treasuries in the USA have risen to a point where they now have virtually no yield (interest) – the lowest level since World War II.

Australian debt markets have been volatile and fixed income trading has been very light.

The A$ has been savaged as the market reassess the commodity markets, as carry trades are unwound, and the US$ strengthened.

The outlook

The unknown lies ahead (as always) – but the knock on effects of the above failures may/will be realised for many months to come as the complicated web of exposures is realised and made known to the market. The key to an improvement on the financial markets may be price stability in the US housing market, but the challenger for policy makers is to arrest the cycle.

Ultimately fundamentals do win out. Ie. Diversified portfolios, quality investments across the asset classes, patient investing for respectable medium-term returns.

Macquarie Group Limited (MQG)

You should be aware that Macquarie Group, the ASX listed company is comprised of two main entities: Macquarie Bank Limited (MBL )and its other non-banking operations. Each has different funding sources and regulatory requirements. It is regulated by APRA, Australian banking regulator and over 100 other agencies.

This listed entity’s share price is down from >$90.00 per share (mid 2007) to currently $26.50 per share on concerns of its business model and outlook. JP Morgan still have a price target of >$71.00.

We are not recommending it as an investment but it highlights the differing views in the market.

The high proportion of short positions in the stock and the alleged false rumours of this week are under investigation by ASIC.

We note that MQG is well funded with >$20 billion in liquidity with a buffer of capital to fund term liabilities. It has no trading exposures to any of the US financial institutions. It remains a profitable business. Its capital at end March was 40% in excess of regulatory requirements.

Moody’s today announced an affirmation of their rating of MQG as A2/Prime-1 issuer, stable outlook. It’s rating of MBL was affirmed at A1/Prime-1, outlook revised to stable from positive.

Macquarie CMT

It is a very secure investment. It has the highest, and maintains, S&P rating of AAAm in the money market. It’s objectives are to preserve capital and be as liquid as possible. It invests 100% in bank issued securities. All funds must be at all times in bank or Government issued at A1 or A1+ rating. No more than 25% can be in one counter party A1 bank, max of 33% to any one A1+ bank. Liquidity is very short term – 10% within 7 days and an average of 70 days. No individual security is over 12 months. Any wonder it only pays 6.6% interest – it is low risk. No bank bill futures exist in the portfolio.

Macquarie Term Deposits

These are issued by Macq Bank Ltd – and fall under the ADI regulations as mentioned above. They are not subject to lending to counterparty risk investments.

Macquarie Wrap investments

All investments are held in custody (Bond Street Custodian – yes, a MBL subsidiary) for the ultimate beneficial interested party – yourself or your SMSF/Trust/company. They are not used by MQG in any form.

Listen to Macquarie themselves

We participated in a lengthy (60 min) phone link am today with Macquarie principals. To listen to a recording of this phone link, please click on the link below.