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Macquarie clears the decks of bad debts -

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Macquarie clears the decks of bad debts

The World Today - Tuesday, 18 November , 2008 12:14:00

Reporter: Peter Ryan

ELEANOR HALL: Overnight the international banking giant Citigroup announced that it will cut more
than 50,000 jobs.

Now Australia's biggest investment bank, Macquarie Group, has posted a 43 per cent drop in
earnings, bringing its second half profit to $604-million.

The company known as the "millionaires' factory" has been hit by more than a billion dollars worth
of bad debts that it has had to writedown. But its directors maintain its business model is still
working.

This report from business editor Peter Ryan.

PETER RYAN: It's been a stressful year for Macquarie Group investors especially those who bought in
last December when the company's shares peaked at $82.85.

Since then, in line with tumbling markets around the world, Macquarie has plunged more than 70 per
cent and today the shares are on sale for just over $20, up four per cent on a better than expected
result.

While market value is only one measure of Macquarie's performance, it's a sobering reality check
for the group's chief executive Nicholas Moore.

NICHOLAS MOORE: I think the last 14 months I think we've all had the experience and really
unprecedented market condition. When bankers get together, one of the questions every banker is
asking is, "Have you ever seen anything like this before?" and of course the natural reaction is,
of course, "I actually haven't seen anything like this before."

And when you actually look at the statistics coming through, actually it would indicated that we
have been through an exceptional period.

PETER RYAN: According to Mr Moore, Macquarie's 43 per cent profit plunge in the six months to the
end of September can be attributed to asset writedowns and one off costs related to the global
financial meltdown.

That includes the sale of the group's Italian mortgages portfolio, a writedown of fund management
assets and co-investments and loan impairment provisions.

Mr Moore says despite what he calls a reasonable pipeline of transactions, the full year result
will also be down, as the global investment environment continues to worsen.

NICHOLAS MOORE: It's pretty clear that conditions have continued to deteriorate since July in
significantly obviously from mid-September. We continue to be very cautious with prospective
capital and funding, as I mentioned before. And as you can expect, these sort of market conditions
which are really unprecedented make any sort of short-term forecasting extremely difficult,
extremely difficult.

So anything we say you have to put in the context of the assumptions that we're going to make.

PETER RYAN: Nicholas Moore reflected on the collapse of Lehman Brothers in early October which took
the world to the brink of financial meltdown.

He says since a range of government interventions, banking bailouts and, in some cases,
nationalisations, there has been a mild reduction in the contagion of fear and suspicion.

And as a result, banks are slowing starting to lend to each other once again, while remaining on
guard.

NICHOLAS MOORE: As a result of the collapse of Lehman we've seen very decisive action taken by
governments across the world. Governments have stepped up and injected capital into the banking
system, they have actually provided guarantees to the banking systems around the world, and we've
seen coordinated monetary policy easing with interest rates, liquidity being injected into the
system.

Now, as a consequence of that, we're actually fuelling up, thaw is actually coming through the
banking market. We're sensing a thaw coming through the banking market but we're still probably too
early to say for most of the other markets.

PETER RYAN: Because of the uncertain global environment, Macquarie has been reviewing its range of
business.

The group's chief financial officer Greg Clarke says cuts have already been made.

GREG CLARKE: We have been exiting or winding back some businesses where the funding requirements,
the funding costs, have increased and don't make the activity as competitive as it was before. In
total, at this point, we expect those initiatives to reduce the funding requirements by
$15-billion.

PETER RYAN: Like other Australian banks, Macquarie Group has access to the Federal Government's
deposit guarantee.

While Macquarie remains well capitalised exceeding regulatory requirements, Greg Clarke says the
guarantee will be used to bolster confidence.

GREG CLARKE: We will be issuing or guaranteeing our deposits, seeking the Government guarantee
deposits greater than a million dollars to make life very simple for the retail market. In terms of
wholesale, we will at some point probably use the Government guarantee as well but we'll also issue
non-guaranteed products and this will all be dependent on market circumstances.

And what you can probably going to appreciate from the funding position is that we have no
short-term needs whatsoever to do any issuing. So there I think there will be a lot of other
issuers go before us.

PETER RYAN: Compared to other global investment giants, Macquarie is less exposed to the impact of
the crisis, despite its portfolio of airports, toll roads and utilities.

And unlike Citigroup and other competitors, Macquarie is yet to flag job losses. And the group's
system of awarding mega bonuses to high achievers remains, despite a looming atmosphere of greater
global regulation and a review of the balance between risk and reward.

ELEANOR HALL: Business editor Peter Ryan.