Botched response to crisis
The Age
Saturday August 15, 2009
BABCOCK & Brown was a tinderbox of debt waiting for a spark.But it was the botched response to the global financial crisis by Babcock's board and management that finally caused the wildfire to spread through the structured finance house.Babcock's business model was riddled with inherent conflicts while the board ignored warning signs on the the group's looming liquidity crunch, instead increasing the company's borrowings further.This assessment into Babcock's demise by administrator Deloitte provides a sobering reminder of how dangerous it is when companies grow too fast using borrowed funds, and risks are either not considered or simply ignored.All this occurred against a backdrop of greed in Babcock where rewards were skewed in favour of staff rather than investors, while short-term bonus payments were structured to spur even greater risk-taking.Babcock's business model was inherently high-risk. High levels of debt were used to generate high yields from traditionally lower-yielding asset classes such as property and infrastructure.This strategy works in buoyant markets and growth can be turbo-charged when debt is plentiful and cheap. But the model falls apart when the funding tap is shut off.The fundamental flaw of Babcock's business was its failings of corporate governance, which resulted in shareholders being cut adrift when the Babcock board shifted allegiances to protect the privately held entity at the expense of the listed company.As it became obvious that Babcock & Brown International would need emergency funding, the board focused on maintaining its survival of that vehicle at the expense of the publicly listed Babcock.This decision represented a fundamental shift in the board's governance but no steps were taken to protect shareholders or listed noteholders.
© 2009 The Age