Published September 19, 2008

Macquarie Group takes heat from market driven by fear

Investors seek relative safety of gold and commodities even as world central banks oil credit markets

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(SYDNEY/LONDON) In a sign that the domino effect of the US financial crisis is far from over, another investment bank may now be the victim of poor sentiment - this time in Australia.

Shares in Australia's biggest investment bank Macquarie Group plunged 23 per cent yesterday on fears that the global credit crunch could hurt its ability to refinance debt, dealers said.

Macquarie shares closed down A$7.88 at A$26.05, having lost some 38 per cent of their value this week. They are down 70 per cent from a 12-month high of A$88.73.

'While we believe the hedge fund 'short Macquarie' arguments do not bear closer scrutiny, the direction of Macquarie's price is telling us Macquarie is broken,' JPMorgan analyst Brian Johnson wrote in a note to clients.

'In this environment, with the hedge funds driving the agenda, it is hard to identify a catalyst to turn Macquarie's price direction around.'

The group, which manages assets such as airports and toll roads globally, has suffered from investor concerns over companies carrying large debts in the wake of the collapse of US investment giant Lehman Brothers.

Moody's Investors Service has affirmed the investment bank's A2 long-term issuer rating but cut the outlook to stable from positive.



And despite positive earnings results on Tuesday, US investment bank Morgan Stanley topped the list of major financial firms scrambling to find a buyer.

CNBC reported yesterday that Morgan Stanley was in advanced talks with US regional banking powerhouse Wachovia. Earlier, CNBC reported that HSBC Holdings and China's CITIC Group were also eyeing Wall Street's second-largest investment bank, although CITIC has denied these claims.

'The fear is who is next,' said John O'Brien, senior vice-president at MKM Partners in Cleveland. 'It almost feels like people scour the books and say who is the next likely target that we can put a short on. And that spreads continuous fear.'

The US Securities and Exchange Commission (SEC) has stepped in to curb short-selling, but share slumps stoked talk that Wall Street's two surviving investment banks may have to join up with a commercial bank to survive.

British bank Lloyds TSB took advantage of the market turmoil to achieve a long-held ambition by scooping up the country's biggest mortgage lender HBOS in a US$22 billion all-share deal to end a slump in HBOS shares prompted by fears about its funding.

Another financial giant, Washington Mutual (WaMu), beleaguered by mortgage losses, has put itself up for sale, sources familiar with the situation said. Potential suitors include Citigroup, JPMorgan, Wells Fargo and HSBC.

Meanwhile, the world's top central banks joined forces yesterday to throw a multi-billion-dollar lifeline to global markets in a dramatic effort to free up bank-to-bank lending, frozen by the upheavals on Wall Street.

In an unprecedented move, the US Federal Reserve made an extra US$180 billion available to major central banks to lend on to their local commercial banks in a bid to get dollars circulating in overnight and term money markets.

Central banks including the Fed, the Bank of England and the European Central Bank also lent out extra funds in their own currencies as markets reeled.

Analysts said the extra funds calmed markets, but this would likely prove only temporary and noted mixed demand from banks for the extra funds on offer in the auctions yesterday.

'There's a complete lack of faith in the markets,' said Jim O'Neill, chief economist at Goldman Sachs Group Inc in London. 'There's a lot of cash hoarding and people losing trust in banks, so the central banks are acting to relieve that. This might not be the last time they have to act.'

Even as equities continue to be battered, commodities are being propelled upwards as investors turn towards them as 'safer' bets. Oil prices surged above US$100 a barrel again yesterday, supported also by the unrest in oil-rich Nigeria.

'Oil is not viewed as safe a haven as gold, but investors consider it safer than equities,' said Victor Shum, an energy analyst with consultancy Gertz & Purvin in Singapore. -- AFP, Reuters, AP, Bloomberg