Phil Green is having his day in court. Well not really. Yesterday was actually the first day of a public examination of Babcock & Brown by the company’s liquidators, and it wasn’t a criminal trial in any way — in fact, quite the contrary. Neither the former BRW rich list member and tax lawyer, who joined Babcock & Brown in 1984, (or any other person involved with Babcock) has been charged in relation to the events at Babcock — what’s more, answers given at such hearings (such as those conducted into MFS and Allco) cannot be used in subsequent criminal proceedings.

At the liquidators’ hearing yesterday in the Sydney Federal Court, Green denied that profit estimates made in February 2008, in which he claimed that the bank would deliver $750 million for shareholders, were “wildly optimistic”. Green instead claimed that “I do contend that our model was not as high risk as some commentators have gone on to suggest”.

It appears that Green’s understanding of risk differs from that of other, less wildly entrepreneurial types. By 2008, Babcock had become a related-party fee factory. A business that had morphed a relatively small and profitable cross-border leasing operation — based out of San Francisco — into a buyer and recycler of infrastructure assets, which would sell those assets to satellite companies (which it managed) and profit from imposing enormous fees. Babcock was dubbed “mini-Macquarie” for its close emulation of the Macquarie Model of charging substantial managements, performance and advisory fees to captive related parties.

But while the assets managed by Babcock themselves would often not be deemed risky (they were in the large  infrastructure assets such as coal terminals, power generators, wind farms, European property and even Irish telecommunications companies), when laden with billions of dollars in debt, Babcock become a tinderbox. All that was needed was a spark. That spark came in the form of the credit crunch.

Babcock’s share price had hit $34 in June 2007. At that time, the company was valued at more than $10 billion (and Green’s stake alone was worth more than $440 million). However, as the cost of debt increased, investors started deserting Babcock’s highly leveraged structure. Within six moths, its share price would fall by more than 55%. By the time Green made his $750 million profit forecast and denied the company had a high risk model, it was sitting on top of $50 billion in debt across the empire. The mothership alone owed more than $12 billion.

Not only that, but Babcock’s assets were highly intertwined. The Babcock mothership owned stakes in its listed satellites, such as Babcock & Brown Infrastructure and Babcock & Brown Power. When the share prices of the satellites started to fall, it destroyed confidence in the entire web. The problem was exacerbated by a market review clause in Babcock’s lending covenants, which gave banks the right to recall its loans. While Green managed to negotiate out of that clause, the company would soon collapse. In its last year of trading, it lost $5.4 billion. Phil Green was (in public anyway), wrong to the tune of $6 billion in his forecasts.

The liquidator’s hearing heard yesterday, internally, Phil Green and Babcock weren’t quite so optimistic about the bank’s fortunes. Fairfax reported that the court heard an internal memo dated only weeks later was “radically different” to the public pronouncement. The memo claimed that “we have fully used our $2.5 billion corporate facility”.

It appears that at least privately, Green and Babcock appeared to be somewhat cognizant of the company’s perilous financial state. Whether their public pronouncements and other dealings (such as the controversial $35 million loan to house broker Tricom, which allegedly benefited Green) leads to criminal or civil action is yet to be seen.

The hearing continues.

Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed, featuring the story of the collapse of the House of Babcock.