Risk Metrics nails Macquarie and Babcock

February 2, 2010

Dear Mayne Reporters,

greetings from the Ballarat public library ahead of lunch-time speech.

The overnight events involving HBOS and Lloyds TSB merger talks were quite incredible with the BBC business editor Robert Preston appearing to get a briefing from British Prime Minister Gordon Brown about a forced merger to stop a run on the biggest morgage provider in the UK.

Just like AIG, HBOS appears to have reacted way too slowly. They should have flogged BankWest to one of the Big Four Australian banks for at least $5 billion months ago.

Instead, the stock suffered its sixth straight fall yesterday and was at one stage down more than 50% in morning trade to 88p before the BBC report turned things around and the formal all scrip merger was announced.

However, the main reason for this quick update is to send you this fascinating Risk Metrics report which was released at 10am.

Whilst it was this earlier version of the report that really damned the ASX, Babcock & Brown and Macquarie Group for Australia's now notorious listed infrastructure funds, this latest effort looks like a nail in the coffin as it reveals how the management agreements and ASX waivers make it virtually impossible for the funds to be taken over.

When an internally managed vehicle like Asciano gets into trouble, the likes of private equity giant TPG can come along and make a bid.

This can't happen with the Babcock and Macquarie satellites because the management agreements, super voting shares, board gerrymanders, debt covenants and pre-emptive rights over the assets make them like Fort Knox.

Risk Metrics really drives home the detail of how all the normal shareholder protections have been stripped away, largely because of ASX and ASIC complicity.

If ASX shareholders were still in doubt about how to vote at next week's AGM, surely now they will agree that at least one of the incumbents should cop a protest vote.

This report is the last thing that Macquarie needs at the moment given the stock has plunged another 13% in morning trade to $29.50, after Goldman Sachs and Morgan Stanley were slaughtered in late trading on Wall Street.

The market is suspecting the worst on any big and complex investment bank and Macquarie isn't being spared.

Macquarie is facing several tough battles this morning. Despite alerting dozens of business journalists at 7pm last night, none of the papers have reported that ASIC interviewed Wilson HTM banking analyst Brett Le Mesuer at 3pm yesterday after Macquarie complained bitterly about Adele Ferguson's story in The Australian yesterday which claimed the millionaires factory had to refinance $45 billion in debt over the next 9 months.

The Australian certainly didn't take a backward step this morning as Adele Ferguson had another go in a comment piece, John Durie criticised Macquarie's slow disclosure of modest exposures to Lehman and AIG and Tim Boreham changed his recommendation to "avoid".

The AFR quoted finance director Greg Ward saying the figure was "at most" $25 billion and then declared: "Even if you take the whole $25 billion, we've got the cash of $20 billion, plus the undrawn facilities."

Business Spectator's Tony Boyd has provided some calm perspective on the situation, suggesting the bank improve its delphic market disclosure practices.

Macquarie can be real bullies at times, but at times likes this is should not be compared with Babcock & Brown which is literally at the mercy of its bankers. Babcock shares plunged another 17c to 75c in morning trade, whilst Macquarie remains 500% up on its 1996 float price.

However, if Macquarie really is enormously strong at this time, it should promptly announce a share buyback to prove the point.

That's all for now.

Do ya best, Stephen Mayne

* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.