The Centro collapse:
David Havyatt writes: Re. "Centro calamity: $5 billion in equity destroyed today" (yesterday, item 1). Would it be possible for one of your extensive list of financial journalists or your equally well accredited readership to explain the Centro story to me? This as I understand it is a commercial property group in which the equity holders are mostly other financial institutions and the lenders are also financial institutions. The group itself was very highly geared – on Stephen Mayne’s figures $17.9B of debt on a market capitalisation of $4.817B. That means the group was always highly exposed to interest rate risk. Interest or market risk is a "standard" risk in financial institutions and is one that prudent organisations incorporate into detailed risk management plans. Once again as Stephen Mayne points out MacBank hedges a large amount of this risk. So why do we have such a large entity with such supposedly impeccable investors getting caught out? Is it because each investor (and director) is assuming that the other guy is checking these details so it must be okay? Is it because, as Robert Gottliebsen detailed, the structure was just too complicated to clearly measure risk? Or is it because ultimately most of the people transacting in these markets don’t really understand the complexities of the markets in which they trade? Don’t get me wrong, I understand that a functioning capital market results in companies that fail. I’m just surprised when it is a failure of this magnitude, with this apparent suddenness and with the supposedly knowledgeable investors.