20th September 2025: With both the Aussie and US markets recently making new all-time highs, I was wondering when the next decent correction or crash might occur. Some of the younger investors here and across the market generally have not yet experienced what many have described as gut-wrenching draw-downs, such as we saw during the GFC. While I wouldn't say I actually enjoyed the GFC, it certainly did present lots of opportunities for those of us who can stomach that sort of volatility and massive market drawdowns.
The biggest issue for me was when to move. You have to take a view as to the liklihood of the duration of the correction or crash. When do you start buying and how much of your cash do you deploy? I was mostly fully invested going into the GFC so for me it was a matter of selling out of stocks that had fallen and buying stocks that had fallen a lot more, so moving from value into greater value. That was all within my quality framework of course - meaning I was trying to avoid any companies with excessive debt or compromised business models - trying to stay on the sidelines with anything I thought could go broke. For the most part, during the GFC at least, I got that mostly right, Babcock and Brown being the exception - I clearly hadn't understood just how much debt they had and how intertwined the banking system was and what the follow-on effects were when banks stopped lending money and BNB couldn't roll over or refinance their maturing debt.
Here's a little look back at that saga:
Ten years on from the GFC, what happened to the once mighty Babcock & Brown?
by Su-Lin Tan, AFR Reporter, June 1st, 2018.
June 12 2008 is a date seared into the memory of everyone who worked at Babcock & Brown, a financial wizard that operated across the globe, buying up high end assets; wind farms, power companies and a lot of real estate.
B&B's share price, that had soared in the first heady years after it listed on the ASX in 2004, had been on the way down for months. The US debt crisis that first surfaced in 2007 was the tip of an iceberg with more grim news revealed daily. Australian companies like B&B, property giant Centro Properties Group and investment firm Allco – all powered by debt – were terribly exposed.
By mid 2008, Centro was underwater, Allco was struggling to stay afloat.
Phil Green: "The biggest disappointment of my life was that I was in charge of a company that resulted in a lot of people losing a massive amount of money." Brook Mitchell/Fairfax Media
But on that Thursday, June 12, it was B&B that grabbed the world's attention when its sinking market capitalisation triggered a debt covenant review.
That set off a series of events that are still unfolding. A company collapse, a complex structure to unwind and a liquidator who to this day is still trying to unlock funds for B&B's creditors.
Now Phil Green, the CEO who spent decades building up the business only to see it all come tumbling down, is finally telling his story.
B&B's Australian operations – it was founded in San Francisco in 1977 – dated back to the early 1980s when Green joined the firm and helped set up operations in his home town of Sydney.
In May 2006 B&B, through its satellite fund Babcock & Brown Capital, bought the $4 billion Irish telecom eircom in a $8 billion transaction (eircom's market value and all its debt), that was a creature of its time. By August 2007, when B&B sealed an $8 billion deal to acquire energy giant Alinta, the times had changed.
Speaking for the first time about the collapse, Green acknowledges the Alinta deal was a mistake.
"We didn't adjust our behaviour [soon enough]," he tells AFR Weekend.
"Had we seen it coming, we would have sold the wind assets earlier and walked away from Alinta. We would have been debt free and geared up ready to go like Blackstone and others to invest in opportunities the global financial crisis (GFC) presented."
"In fact, we launched a sale for the US and European wind assets in late 2007, unrelated to the GFC. We ran a beauty parade with investment banks. The realisation of the assets, aside from what had already been listed in Australia in what is now Infigen, [would have been] at least equal to the B&B market capitalisation."
"But we took it to the market six months too late."
'I was wrong'
The mistake was not borne out of carelessness. Green and his fellow B&B executives were experienced finance hands who had seen a lot, but in some ways the 2008 crisis had no precedent.
"What we had seen, what I had seen, 15 years to 20 years from the 1987 crash, from the recovery in the early 90s through to 2004 was a lot of short-term blips … whether it was the Russian crisis, the Asian debt crisis, the first tech bubble or the Iraqi wars, market volatility would drop 20 per cent and go back to growth," he says, leaning forward to emphasise his point.
"Short-term dips didn't matter ... that was what we had seen and that was how I saw the market in 2007, early 2008. I was wrong.
"I and many others weren't expecting a liquidity crunch more severe than had been experienced at any time since the Great Depression. It was a misjudgment."
B&B's former head of global infrastructure Peter Hofbauer left Sydney at the end of 2007. Louie Douvis
Back then, in February 2008, as B&B announced a 58 per cent increase in net profit to $643 million for calendar 2007, Green told investors he expected a 15 per cent lift in net profit for 2008.
"We believe we have positioned ourselves well to take advantage of opportunities that may arise as a result of global capital markets dislocation," Green said then. It was the last time he would be so upbeat about the company he had helped build for more than 20 years.
As autumn turned to winter that year, the short sellers were circling B&B. The share price was getting perilously close to a key market capitalisation measure. If it fell below $2.5 billion, a debt covenant review would be triggered and B&B's banking syndicate would review financing arrangements.
On Thursday, June 12, B&B's market cap dropped below $2.5 billion and kept falling. The shares ended the day 21 per cent down, sinking to a three-year low of $6.90.
Babcock & Brown once had a market capitalisation above $10 billion. Jeremy Piper
From the outside it was shocking. From the inside, it was surreal. I was among the 1500 who worked for B&B at this time. The first many of us heard of the covenant was at one of the company's spirited town hall meetings.
The next day – Friday the 13th – was a very bad day. B&B issued a statement to the ASX assuring investors that the covenant review was not a default or breach of covenant.
The next week was bedlam. The phones in the offices of B&B went nuts. Some employees were among those who had taken out margin loans to buy shares and were now being told to cough up the gap between the price now and what it was when they had borrowed. Many turned off their phones and hoped it would all go away
As it turned out, at the end of June the banks chose to waive their right to review.
But the damage to confidence could not be undone, especially amid feverish speculation on the size of the B&B debt. On August 21, B&B released its interim result. It owed $3.2 billion to 25 banks, borrowed through the group's operating company Babcock & Brown International Pty Ltd (BBIPL).
Internationally the full wrath of what would come to be known as the global financial crisis was about to hit in a bleak, watershed month: Black September. On September 15, Lehman Brothers filed for bankruptcy. In that same week, Green resigned from the B&B board.
With international markets in full panic mode, he thought perhaps a fresh pair of eyes could find a better solution for shareholders, he tells AFR Weekend. He felt he was too close to the business, he says.
But B&B's shares continued to falter. By Christmas they were down to just 15.5 cents.
Phil Green and Trevor Loewensohn. Alceon, their B&B offshoot, has many of the hallmarks of the young B&B but they say it will never go public. Brook Mitchell/Fairfax Media
Babcock's woes also fuelled feverish speculation about the massive debt levels of Macquarie and its satellite funds. Within the space of six months, Macquarie's share price almost halved, falling from around $40 in September 2008 to just over $20 six months later.
In October 2008, the Rudd government stepped in. Fearing a run on banks, it announced a bank guarantee, covering all authorised deposit-taking institutions (ADI). Macquarie was an ADI. The "mini Macquaries" were not.
"We had no issue with the government taking a different view on banks and good luck and well done to Macquarie," Green says.
"They acted promptly, and used the government guarantee to rebuild the balance sheet, and generated significant profits. They did a very good job for their shareholders."
There was no such luck for B&B. After a series of ASX queries and trading halts, the last straw came when investors in the company's NZ-listed subordinated note holders voted against a resolution to restructure the terms of the notes. Administrators were appointed in March 2009.
On June 12, 2009, exactly a year after the banking covenant review trigger, shareholders received a grim letter from the joint administrators advising their shares in B&B had no value.
"We as administrators have reasonable grounds to believe there is no likelihood that holders of ordinary shares in BBL [Babcock & Brown Limited] will receive further distributions for their shares," appointed administrators Deloitte wrote in a letter to shareholders, which also went to the ASX.
"The effect of the above is that shareholders have no ongoing economic interest in BBL."
Speaking for the first time about the collapse, Green acknowledges the Alinta deal was a mistake. "We didn't adjust our behaviour [soon enough]," he tells AFR Weekend. Sean Davey
Six days later, B&B delisted.
Nearly 1500 employees in the US, Europe, Asia and Australia would lose their jobs (though some were later "recycled" into businesses spun out of asset sales). One of Australia's biggest corporate collapses – of a company once valued more than $10 billion – was under way.
Looking back
These days, Green looks healthier and thinner, which he attributes to a less frenetic lifestyle. As he looks back to the B&B collapse, he talks of his regrets.
"For more than 40 years, including almost ten with Alceon, I had been in the business of helping people make money. The biggest disappointment in my life was that I was in charge of a company that resulted in a lot of people losing a massive amount of money," he says.
"It's something I will always regret."
Dressed in his trademark, tie-less business shirt and trousers, the silver-haired Green has resurfaced in recent years as a founding partner of a B&B offshoot Alceon, led by Trevor Loewensohn who was head of capital markets at B&B when the walls came tumbling down.
Alceon, with $1 billion in private lending and private equity investments, has many of the hallmarks of the young B&B but it will never go public, says Loewensohn. Another important difference is the way it structures its loans, mainly to residential developers, and private equity investments in companies like fashion labels Noni B.
"It's a bit of a back to the future but everything now is separate, not connected," Loewensohn says.
Babcock's woes also fuelled feverish speculation about the massive debt levels of Macquarie and its satellite funds Jim Rice
"That way, if there are problems, they are contained and manageable, and we have the flexibility to deal with them. It means we sleep better."
Like Green, he wishes B&B had dabbled in less complicated investment structures.
"Having multiple funds invested in assets made it harder to sell or take remedial action in a global liquidity crunch. That exacerbated the contagion effect across the group," he says.
Green admits B&B was "too loose" with debt. It was, however, very much the fashion of the times.
"We shouldn't have leveraged to the extent that we did, we didn't need to. [But] we had massive growth, and we wanted to take advantage of that growth because debt was cheap.
"It would have been nice to raise $1 billion when our share price got to $20 ... but we knew at that time we could also do it with debt and not have to stop for three months [doing deals] while doing a capital raising.
"It was a crazy time."
In hindsight, Green acknowledges the "headstock", what he calls B&B, as opposed to the other listed satellite funds, should never been geared.
"Relative to our market capitalisation, our gearing wasn't high, but relative to our hard assets, we were gearing against a lot of goodwill and our goodwill then collapsed," he says.
By 2007, B&B executives were of course aware of the US sub-prime lending crisis and the subsequent turmoil. But they took the view that despite the increased risk, B&B had enough money in the bank to keep going.
They thought they could ride it out.
The sliding door moment
Back in the heady days of the early 2000s, Sydney's financial elite bragged about their investment portfolios and their waterfront mansions. But another telling measure of success was the size of an investment firm's alcohol stock.
And in its heyday, B&B's fridge was always full. Top-shelf labels were always available to toast the closing of yet another deal.
Winning, particularly when it involved billions of dollars, was dizzyingly seductive.
In the two weeks leading up to the Alinta deal, hardly anyone slept, perhaps not even the chef at Chifley Tower's then iconic Forty One restaurant which received a steady stream of steak orders from B&B's offices a few levels down.
At the time, the Alinta victory seemed all the sweeter because B&B had beaten its biggest rival, Macquarie Bank, from whom it also got its nickname "The Mini Macquarie".
Crucially, B&B opted to raise its bid to $8 billion in the second round to win the prize and it was mostly funded by debt.
This, says Green, was B&B's Russian roulette moment.
"We had pulled our heads in but with Alinta we made an exception," Green says, ruefully.
Up until then Green's only nemesis had been the market, but Alinta was a debt monster.
Green regrets taking Alinta's energy retailing unit as well as its electricity and gas distribution networks, power plants, gas pipelines, a wind farm and asset management arm.
"That was our sliding door moment," Loewensohn agrees.
B&B's former head of global infrastructure Peter Hofbauer left Sydney at the end of 2007. He speaks from London, where he now manages infrastructure investments for one of Britain's largest pension funds, Hermes.
He says: "2007-09 was clearly a challenging time for B&B management and key stakeholders and in retrospect the inherent conflicts embedded in the business model particularly a high growth model, proved challenging to manage."
"What I took away from B&B was the need to ensure conflicts are appropriately managed and governance and incentive arrangements are properly aligned to investor success."
Would've, could've, should've
When we speak at Alceon's office in Sydney's CBD, the mention of "incentives" has Green shaking his head. He differentiates compensation – be it short term such as cash, or long term such as equity – from one-off rewards for specific deals.
"I should have rewarded people for the performance of the asset over a longer term, not rewarded the transaction," he says.
After B&B floated, the business changed from being an advisory company to an asset management business, one which needed discipline and loyalty rather than one-off wins.
Green says if he had his time again he would have been tougher on people who didn't fit into the business rather than changing things to try to accommodate them.
"And we would've run slower." Speed was the problem rather than scale, Green says.
Loewensohn says B&B would have been better operating at a marathon pace rather than a sprint. But why sprint when you can jog, AFR Weekend asks.
Green answers with a rugby league metaphor: "Because you don't see footballers earn an easy life. Why would they want to be in the State of Origin? Why do they run the risk of injuries?"
"It's human nature to always try and do better, to win," Loewensohn chimes in.
Green says B&B was criticised for being reckless but there was nothing wrong with its financial engineering or the assets it was buying.
"There was nothing inappropriate about it in a financial or legal sense – this was the way to minimise transaction risks and maximise returns," he says.
But he concedes the complex tax structures of the funds and ownership of the assets left B&B little room to manoeuvre when it needed it most. They were simply too complicated to unwind in a hurry.
What's left
Former B&B chief financial officer Michael Larkin, who was tasked with selling all of B&B assets in the operating company BBIPL, is still on the job, with two assets left to sell.
Larkin declined to give details on the assets or his thoughts on the past, but he does say corporate Australia deals with insolvency poorly.
In the US, Chapter 11 of the Bankruptcy Code allows businesses to reorganise assets such that they can keep operating and pay creditors over time. And in Europe, banks are more prepared to hold off selling distressed assets until better prices can be negotiated.
Countries outside Australia have better "strategies to protect the value of assets", Larkin says.
Meanwhile, B&B liquidator Deloitte is still clearing the company's debts with its creditors.
Since B&B's collapse, four sets of legal proceedings representing 1028 shareholders, claiming to be unsecured creditors of BBL, commenced in the Federal Court, with shareholders seeking to recover about $145 million in total. Over the course of these proceedings, it was revealed that B&B paid dividends out of capital in the 2005, 2006 and 2007 financial years. However, this was ruled to be a technical breach with no material effect on the financial position of B&B.
Last November Deloitte advised that the combined total of the claims had been reduced to $16 million due to a "lack of substantive information" in the creditors' proof of debt. One case has been dismissed; the remaining three proceedings are still in the courts.
One of B&B's former funds, Babcock & Brown DIF III Global Co-Investment Fund, filed a writ against B&B's operating company BBIPL and names 33 defendants, including Green and other key executives.
The case was heard in the Victorian Supreme Court but has now been transferred to the NSW Supreme Court in April. It has been set down for trial later this year.
The claim is for commercially misleading conduct. The fund alleges B&B had pressed on with a $25 million investment in US coin laundry operator Coinmach in 2007, despite the worsening global financial situation.
On Thursday B&B liquidator Deloitte Restructuring Services partner David Lombe told AFR Weekend: "This has been a complex and, obviously, long-running matter.
"I don't believe that, at the time of my appointment as voluntary administrator in 2009, that anyone would have thought the process would still be running in 2018.
"Shareholders have been within their rights to ask the courts to make determinations on various matters. But until current proceedings are finalised, a dividend cannot be paid to creditors, and if proceedings are successful, it's possible that no dividend will be paid to note holders."
Final words
Green has one more thing he wants to say and it's about the former B&B board chairman, Elizabeth Nosworthy.
This time the regret is not about money lost but personal pain.
"I felt bad for all the people who had been friends, employees and partners of B&B for many years, for all our directors, and many other external stakeholders," he says.
"One person who got the most damaged by the whole thing, I feel, is Elizabeth. She got very little financial reward out of the whole exercise, and she suffered badly.
"She's a lovely and capable person who worked tirelessly throughout and who fought to the end for the company and shareholders and she didn't deserve it."
All in all, as many as 30 ventures, mergers and spin-offs can be traced back to B&B. This was, Green says, a good outcome for those now controlling those assets.
But that doesn't take away the sting of the B&B collapse which hurt all its shareholders – including Green.
"I lost most of my wealth. I was invested personally in every B&B listed satellite. I didn't take any cash off the table when we listed," he says.
"We didn't do anything illegal. We did our best. But many people including myself, my friends and my family lost a lot of money."
The writer worked at Babcock & Brown from June 2006 to November 2008 and was also a shareholder.
Su-Lin Tan reported on housing, commercial real estate and property finance. She also covered China and Asian business, trade and politics.
--- ends ---
Source: https://www.afr.com/companies/financial-services/ten-years-on-what-has-happened-to-the-once-mighty-babcock--brown-20180406-h0yfdj [01-June-2018]
So, could it happen again? Absolutely. Not in exactly the same way, but there's plenty to suggest that a similar crisis could occur in our future, even our near-term future. Whether the world's central banks, governments, and various regulatory authorities would act differently to change the duration of the event and its outcome is uncertain, but hopefully they have learned from what they did right, and what they did that actually made things worse at the time.
In terms of us as ordinary "retail investors", we can protect our own downside in various ways, including by avoiding high risk companies, such as those with a lot of debt that will need to be refinanced at various points in the next few years. However, that's only one risk - the risk of credit markets tightening or refusing to lend altogether as in the GFC. There are plenty of other risks. I see much of them associated with debt however, in terms of identifying specific company risks. It's hard to see a company going broke when they are in a net cash position, are profitable, and what they produce, or the services that they provide, will remain in demand even in a crash, correction, recession, etc. Sure, their share price could halve or worse, but that's not a permanent loss of capital unless you sell out at those lower prices. The real risk is that a company goes to zero and you lose 100% of your investment, as happened with BNB due to the GFC, although as that article clearly explains, there were a LOT of learnings from BNB, and not all of them were about debt - some were about incentives and the behaviour that those incentive structures resulted in, and the outcomes of that behaviour, i.e. the type of company and the structures within it that were created.
But markets are looking frothy - and they can look overbought or frothy for longer than may people expect. They can also "correct" in a very short time period when an appropriate catalyst or two occurs.
In the past week:
Apart from the French CAC, all the positive movement was in the US once again. And the NASDAQ was leading that, so tech once more.
And there's certainly very significant growth into the future for a lot of those big tech names, but they're not ALL going to get their AI strategies and other strategies right; they're not ALL going to grow by the same amount. There will clearly be winners and losers, and some of those losers might be good companies that just have too much euphoria in terms of future growth expectations already priced in now, and their share prices will at some point reduce to reflect their actual performance.
And that's just on a specific company by company level. There are also events analogous to a tide going out that takes all boats down with it. We are always climbing a wall of worry, but for the most part we still keep climbing that wall; we don't slip down too often, and we don't fall off the wall.
Which is all to say that I reckon there is either a crash or correction due, overdue actually, and I've been thinking about how best to position myself for it.
I'm not one to go to cash, because (a) there's the opportunity cost in terms of the growth you forego by being out of the market with those investable funds, and (b) I've never been particularly good at timing the market, so if I go to cash it will probably mean the market will put on another 50% before my predicted crash or correction occurs. Also, (c) I've been able to swap into better opportunities while remaining (mostly) fully invested in past events such as the GFC - it's not as lucrative as having a big pile of cash to deploy at such times, but it doesn't mean my hands are tied either.
That said, in my super, I'm currently around 14% cash, and I'm fully invested everywhere else. But I'm trying to position more defensively. With the exception of my small speccy stock portfolio which currently holds just 6 positions in higher risk companies, I am positioning myself predominantly in quality companies with zero debt and quality, shareholder-aligned management who produce stuff or do stuff that will remain in demand. For me, that means I'm overweight Aussie gold producers, and I also hold companies like ARB, MAQ, LYL & GNG.
But I am avoiding companies that I reckon have too much growth already priced in, or have significant debt.
Anyone else have thoughts on this they'd like to share?
Glad to hear others are thinking along the same lines. Agree with all the comments around the more obvious potential triggers such as overinvestment in AI etc, but also conscious that crashes can also occur due to an event or situation that most haven't foreseen, with COVID being a prime recent example. Our world has the potential to generate all kinds of interesting surprises.
@DrJP , crypto gives me the heebie jeebies too, but its performance over a decent period of time has left a lot of other assets in the dust. The fact that Tether hasn't had a full independent audit is still a concern for me, despite their reported shift towards a greater proportion of treasuries in recent years.
Personally, I have been transitioning my real life portfolio into a greater proportion of defensive stocks such as those with big moats, low debt, solid cashflow etc. Selling some that appear to be particularly overvalued, but I also have a flaw of hanging onto past outperformers due to sentimentality (CSL...). As stated by Buffet, Berkshire is likely to underperform in some boom years, and outperform in downturns, so definitely worth exploring if the market is looking frothy. Here's a look at how they did during the downturns you mentioned.
On this note, what does everyone think about the classic old LIC's like AFIC? Graphs like this (taken from AFIC website) are both indicative of the current market situation, as well as tempting me to buy some shares. I'm wary of LIC's being prone to ongoing share price discounting due to the rapid rise and new paradigm of ETF's, but I also feel like reversion to the mean may result in decent performance during market turbulence for those who are patient.
Yes, in a wind-up situation the NTA would be almost fully realised @Stumpy , but you need to look at the AFTER-tax NTA in that scenario which includes provisions for CGT and because AFIC and Argo have held so many positions for such a long time their unrealised CGT is significant, hence the big differences between their BEFORE-tax and their AFTER-tax NTAs as highlighted below in the orange rectangles:
When you're looking at the after-tax NTAs which would apply in a wind-up situation, there's actually NO discount: AFI closed on August 31 @ $7.33/share which is a PREMIUM to their $6.95 after-tax NTA at that time, and ARG closed @ $9.59, which is also a premium to their $9.18 after-tax NTA.
While ARG's and AFI's current share prices are lower than their 31st August share prices, their after-tax NTAs are also lower based on their respective weekly estimated NTA disclosures. Both only disclose their estimated before-tax NTAs weekly, and their after-tax NTAs once per month (after the end of the month) but their before-tax NTAs have both dropped in the past few weeks, so their after tax NTAs would also have dropped.
So you are actually paying a premium in a wind-up situation, not getting a discount.
Note: The last trading day in August was the 29th, as the 31st was a Sunday, so the 29th August closing share prices have been used there as they didn't trade again until Monday 1st September.
The reason why the after-tax NTA is mostly ignored and only disclosed once per month is that these LICs (AFI & ARG) getting wound up is highly unlikely - there is no pressure on them to be wound up and they have enough loyal shareholders who are happy to hold regardless of the discount or premium in the SP. But if you're looking at the real value that would apply if the funds were to be wound up or if you could hypothetically takeover the whole LIC and sell all of their positions, then the discount evaporates because the before-tax NTA no longer applies, instead the after-tax NTA applies.
Anyone looking to takeover one of these LICs has to consider the after-tax NTA to be the real NTA that matters to them because that capital gains tax is either going to become payable as a result of the transaction (the fund being taken over) or else the acquirer would inherit those CGT liabilities and the tax is still payable at some point in the future.
Additionally, because LICs operate a profit reserve and their payout ratio or dividend yield is discretionary, it's a stretch to say that you are buying the cashflows of the underlying companies held by those LICs. Remember that fees apply, both base management fees and performance fees also with most LICs (not all), but they all have base management fees, and those are deducted from the profit reserve. You are buying exposure to those cashflows, but you are not getting all of the benefits as you would be if you held those shares directly.