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The Millionaires’ Factory exposes the good and bad of Australian millionaire manufacturer Macquarie bank


Allen & Unwin

The Millionaire Factorysubtitled “the inside story of how Macquarie Bank became a global giant” by financial journalists Joyce Moullakis and Chris Wright is an impressive, informative book that I have enjoyed reading.

It not only provides insight into the evolution, organisation, scope and success of the Australian financial giant, but also says a lot about Australia’s financial history.

The large number of Macquarie alumni (the book suggests around 100,000) and current workforce (more than 18,000 worldwide by 2022) will ensure a prepared market.

But for others, despite the many interesting character sketches and well-written “travelogue” through Macquarie’s exploits, the book can be a bit heavy – for one main reason.

Macquarie is a gigantic organization that has been involved in a large number of complex financial activities on the international stage.

Macquaries 2022 annual report claims to be active in 33 markets

Only the outlines of the most important transactions necessarily make up a large part of the book.

Unfortunately, most need pretty much an entire book to explain and at least require a high level of financial expertise to understand it properly.

Those who aren’t financial experts can skip the specific deals and will still find a lot of value in (at least) two parts of the book.

One is the information about the management and governance of the organization, including the adaptability of the divisional structure to opportunities and challenges.

Macquarie has consistently shown a willingness to expand into new (usually “adjacent”) activities suggested by staff (rather than top management) under a strict risk management framework.

A second (related) element is the emphasis on the quality of its workforce and its reliance on its workforce to research, generate and develop new business.

Turning employees into millionaires

The reward schemes carry the promise of rich personal rewards if successful, while failure in a new activity that has been given the go-ahead under strict risk controls is not a career-limiting outcome.

Some readers may find it strange that the names and characteristics of key Macquarie personnel are constantly mentioned, but it is the people involved who have made Macquarie what it is today. As the saying goes, in financial institutions, the most important assets walk out the door every night (or in many cases early in the morning).

One thing the book does not do is provide tables or charts showing Macquarie’s tremendous growth since its formation from Hill Samuel in 1985, its integral role in Australia’s financial system and its successful overseas expansion.

Of course, given the scope of Macquarie’s activities, relevant metrics are not easy to identify for comparison purposes. For example, Macquarie Bank (the ‘commercial bank’ part of the group) is small compared to the big four banks, with resident deposits of about a third of the smallest of the big four, ANZ.

The Macquarie Group generally has about half the number of employees of ANZ, but total staff costs in 2022 were about 15% higher than those of the ANZ (reflecting the words “millionaires’ factory” used in the title of the book) .

Pushing boundaries

The authors refer to, but do not address, several questions from the critics of the Macquarie Group.

First, to what extent do Macquarie’s profits come from pushing the boundaries of tax arbitrage (such as moving profits from high-tax locations to low-tax locations and moving losses in the other direction), so that the resulting profit is not a reward for adding social value, but is instead generated at the expense of the taxpayer?

There are always tax loopholes due to imperfect drafting, or gray areas that fall between what is clearly within or outside the law. The likelihood of exploiting such loopholes is greater when multiple jurisdictions are involved, and the book references several, such as the “cum-ex” dividend arbitrage. There are others.

Read more: The heist of the century: The cum-ex trading scandal

The profit motive underlying Macquarie and its pay structure naturally leads to attempts to exploit such opportunities, even if private profits are purely at the expense of government tax revenues and there is little or no social value creation involved.

The authors quote former treasurer Peter Costello as saying, “They manipulated tax breaks to the inch of their lives,” often leading to changes in tax laws to prevent such activity. How much this ethical behavior is is a matter of opinion!

Putting a heavy burden on customers

The second question is, how much of the net benefit is in closing value-added deals for Macquarie and how much for its customers?

In addition to being nicknamed “Millionaires’ Factory”, Macquarie is also referred to as the “fairy factory”.

For example, in the now-abandoned infrastructure trust structures, different parts of Macquarie would receive fees: when buying assets for the trust (and “cutting the ticket” via a profit on the sale price in the trust), fees for managing the trust, commissions from the sale of units in the trust to investors, etc.

Macquarie’s position as an innovative maker of financial products and structures has often given the company a first-mover advantage, allowing Macquarie to extract much of the value created without a competing supplier.

Clearly some value must be delivered to the customer, and concerns that a perceived unfair sharing of benefits would make it difficult to repeat the exercise limit the amount of value extraction possible. But what is “fair” is a matter of opinion!

Exploiting the ill-informed

The third question is: to what extent has Macquarie benefited from exploiting misinformed (wholesale and retail) consumers and users of its financial products – such as the Hayne Royal Commission turned out to be the case for the four major banks and others?

Macquarie escaped from the Royal Commission with a barely tarnished image compared to the big four. One reason was that the then CEO, Nicholas Moore, was able to point to the recovery activities it had undertaken ahead of the committee after recognizing the issues.

The Millionaires Factory exposes the good and bad of Australian.0&q=45&auto=format&w=754&fit=clip
Macquarie Group chief Nicholas Moore leaves the Hayne Royal Commission in 2018.
Joel Carrett/AAP

But Macquarie was also lucky that the Royal Commission’s mandate only required her to look back as far as the global financial crisis. If it had been necessary to look further back, the findings would have been different.

Prior to the financial crisis, Macquarie (and other banks) created highly financially mature, structured products and marketed them to private (and other) investors. Even financially savvy investors would find it impossible to understand the risks or the value of the products they were selling.

A vast majority of these products would not meet current requirements design and distribution obligations aimed at consumer protection.

This was typical of the time and Macquarie was not particularly different from other suppliers of such products. But whether Macquarie, in the absence of effective regulation, would begin to push these boundaries is a matter of opinion!

Still an Australian success

There is no doubt that Macquarie is an Australian success story.

Its 2022 annual report indicates that A$100 invested in its stock at the time of its listing in 1996 would have grown to $10,000 by 2022.

More importantly, it has provided or enabled financing for many of its clients’ investment projects that might not have gone through otherwise.

By taking an active role in the management and governance of major projects (such as toll roads and utilities), it has enabled more efficient execution of such projects than would otherwise have been the case.

It is currently almost at the forefront of financiers focusing on “green finance”, where activities that generate social and environmental benefits can be consistent with benefiting from a first-mover position.

There will no doubt remain many critics of Macquarie’s profit-orientation and a resulting potential conflict with broader social causes. They would greatly benefit from reading this book, both to find specific examples of that conflict, but also to see that the pursuit of profit is not always incompatible with social goals.

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