As a consequence of that, when we look back at 2008, we were never in the position of people wanting to have their money back and us not having the cash available to give to them. We always were at pains to point out that we had match-funded our book. From a regulatory viewpoint, at the moment the regulators require people to be able to continue to run their businesses for 30 days assuming the financial markets have closed so they can’t access new money from the market. The test we use at Macquarie is that we have to be able to run our business for a full year assuming the financial markets have closed. We assume that we won’t be getting any money coming in the door for a year and then we still have to be able to meet all our commitments. Effectively, we pre-fund all our commitments for the next 12 months, including debt repayments and other costs.
After 12 months if we assume the markets have remained closed, we then do an analysis and say “Well, if they continue closed what happens after that?” And basically, with the matching of the assets and the liabilities, it means as our assets free up we will have the cash then to pay the liabilities down. So we’re working on a worst-case outcome all the time from a funding viewpoint.
Knowledge@Australian School of Business: In some cases even the best risk analysis isn’t really going to work so what do you do then? Do you just walk away from it? How can you get the best out of the situation?
Nicholas Moore: Of course, we don’t know what the future will be and even with the best work sometimes you’ll get things wrong. That said, we have been pleased so far that while we went through various financial crises, when we have lost money on positions, to date they have all been within what our expected loss amounts were. We obviously didn’t like losing money in the 2008 crisis, but the losses that we did incur were within the limitations we had set for ourselves.
This reinforces that our approach is probably the right way. Will we always get it right? The answer is that the future is entirely uncertain and we probably won’t – but we always have to try to make sure that we are focusing on what can go wrong and making sure that that loss is affordable.
Knowledge@Australian School of Business: So finally what are the challenges going to be for the year ahead? There’s the risk of the unknown, but what else can you see coming?
Nicholas Moore: From a Macquarie viewpoint, the issue we’re dealing with is that we have six different businesses across the group and three or four of those businesses are going very well indeed – they actually have record performances. Our lending, funds management and retail businesses are all going as well as they’ve ever done. Our FICC (Fixed Income, Currencies and Commodities) business has a whole range of exposure to the commodities and the resources markets and we think this year it’s going to be doing better than it did last year, albeit last year it was very, very challenged by the downgrade that took place in the US and the Greek crisis.
The two businesses that are challenged at the moment are our securities business and our advisory business within Macquarie Capital. Last year between the two of them they didn’t make a contribution to the group and with both we’re hoping this year will be better than last year.
To have a better year next year and the year after those businesses need more confidence in the equity market out there. Plainly the world has turned off risk dramatically; we’ve never seen such low prices for fixed income and such low prices for cash… The reason we’re seeing such low prices obviously is that’s where the capital’s flowing; the capital isn’t interested in terms of equity because equity is viewed as being too risky.
So the flow has all been against the equity market, which drives the securities business and the advisory business. For us for the year ahead, the big question is: how will that risk-return equation for the whole world actually play out? We are looking at the way the world’s view on risk is moving and as long as the world’s not taking risk in terms of equities those businesses will be subdued.
