Revealed: MacBank's Code Red to the government

AS THE tsunami engulfing global markets in September 2008 crashed into Lehman Bros, a besieged Macquarie Group wasted little time swinging into action.

Under attack from short-selling hedge funds and with its share price plunging by half, Macquarie launched a concerted lobbying effort with the government and regulators.

Documents obtained by BusinessDay under freedom-of-information laws reveal the haste and well-targeted strategy Macquarie employed as the maelstrom of the global financial crisis rocked banks around the world.

Macquarie's efforts appear to have been brutally efficient - within days the Australian Securities and Investments Commission would impose a ban on the short-selling of financial stocks - an investment strategy used to make money by punting on a share price falling further - that would halt the plummet of the bank's shares.

Within weeks, the government would implement a banking deposit guarantee and a wholesale lending agreement letting Macquarie and other banks use the government's stronger AAA rating to borrow money when credit markets were

 

closed. The backroom dealing began within hours of the collapse of Lehman Bros on September 15, sparking the most intense phase of the global credit squeeze.

The next day, Macquarie's Trevor Burns typed a two-page email to the head of the federal Treasury's markets division, Jim Murphy, with the subject line marked ''confidential''. The email has been identified in response to a specific FOI request for correspondence concerning Macquarie's representations to Treasury on the state of global financial markets.

Mr Burns is well connected in Canberra's corridors of power. An ex-chief of staff to Howard government minister Warwick Smith, he followed Smith to Macquarie, although he later moved to a consultancy with the bank.

A day later, on September 17, as global markets reeled and Macquarie's share price continued to slide, a flurry of emails flew between the floors of Sydney's 1 Martin Place, which houses Macquarie and ASIC. Another email came two days later. The existence of those emails was revealed in response to an FOI request for correspondence between Macquarie and ASIC on short-selling and the state of financial markets.

Appearing to show uncommon haste for the corporate regulator, ASIC acted within two days of the first email flurry. On September 19, ASIC implemented a ban on naked short-selling, effectively stopping the rout in Macquarie shares, which surged 9 per cent that day. Within days, ASIC slapped a full ban on short-selling financial stocks. However, Macquarie was free to continue its normal market trading activities, which included short-selling shares in other companies.

By early October, the government had swung into action, guaranteeing all deposits and implementing a wholesale funding guarantee. Macquarie spared no effort in its attempt to shore up support. BusinessDay understands that as part of its intense lobbying effort, Mr Burns met then minister for financial services Nick Sherry, where he pushed for a ban on short-selling. Macquarie chief executive Nicholas Moore is also believed to have met Mr Sherry.

The flurry of activity from within Macquarie around the collapse of Lehman Bros is starkly at odds with repeated assurances from chief financial officer Greg Ward that the bank was at no stage under any threat as it had adequate reserves to meet all obligations.

But that argument overlooks the crisis in confidence engulfing Macquarie, evident in its share price plunging to a $15.75 low.

Treasury has refused to release the contents of the email Mr Burns sent to Mr Murphy in the hours after Lehman collapsed, saying the document ''was marked as a confidential communication''. Geoff Miller, Treasury's general manager of corporation and financial services, said Treasury had consulted Macquarie in deciding not to release the email.

BusinessDay applied for a review by Treasury of its refusal to release the document, citing public interest and highlighting that Australian taxpayers' AAA credit rating had been lent to banks that were using the stronger rating (Macquarie has an A rating) to obtain money on credit markets otherwise frozen shut in the credit crisis. The Treasury official who conducted the internal review of the department's rejection of the request was the same executive who received the initial email from Macquarie.

Mr Murphy rejected the appeal for the release of Mr Burns's email and proceeded to broaden the scope of the rejection, saying its release ''could reasonably be expected to adversely affect the Macquarie Group''. He detailed a ''longstanding understanding'' and a ''mutual understanding'' between Treasury and Macquarie that correspondence is confidential.

Mr Murphy rejected the argument that the marking of correspondence as confidential does not guarantee its protection. He is one of the highest-ranking officials in Treasury and has responsibility for policy relating to the financial system, including prudential and corporate regulation.

A day after Mr Burns wrote to Treasury, the millionaires' factory turned its attention to the corporate regulator.

In response to an FOI request, BusinessDay has been provided with a schedule of email correspondence between Macquarie and ASIC. Unlike Treasury's response, ASIC has revealed neither the identity of the Macquarie emailer nor the identity of the recipient at ASIC. But the scope of the request to ASIC specifically sought representations involving short-selling.

ASIC FOI officer Mirijana Soldatic told BusinessDay she identified 14 documents fitting the request.

Macquarie emailed ASIC three times on September 1 as markets tightened ahead of Lehman's collapse, first with a 17-page attachment, then a 34-page attachment and then a 92-page attachment. But it was not until September 17 in the aftermath of Lehman's collapse that the pace quickened. Seven emails were identified under FOI as coming from Macquarie to ASIC on the state of markets and short-selling.

In a letter responding to BusinessDay's application to make the documents available, Ms Soldatic said she would release none. She said the first document ''is an email from ASIC to Macquarie concerning short-selling and false market rumours''. The other 13 ''contain further correspondence between Macquarie and ASIC concerning the matters contained in document 1''.

Macquarie was one of the biggest users of the government's offshore funding guarantee, raising nearly $20 billion, and set up a unit under the direction of trusted Packer-family banker Ben Brazil. Macquarie's strategy, revealed in BusinessDay last year, to raise funds under the federal government guarantee and lend them on at a higher rate to foreign companies, is believed to have enraged Treasurer Wayne Swan.

Macquarie's Greg Ward has always maintained Macquarie had adequate reserves and was never in danger of collapse. In early 2009, Deutsche Bank analyst Ross Brown quipped to Mr Ward at Macquarie's earnings result: ''If it wasn't for government guarantees we might not be sitting here having this conversation.''

In a letter to the editor of the The Sydney Morning Herald this year, Mr Ward wrote:

''Macquarie Group strongly rejects the claim that in 2008 Macquarie 'was in danger of collapse'. Throughout the crisis Macquarie remained profitable with significant excess liquidity and surplus capital.''

While that may be true, the run on Macquarie's share price was turning into a self-fulfilling prophecy. Macquarie spokeswoman Lisa Jamieson declined any comment for this story.