Global investment and advisory firm Babcock & Brown Ltd considered acquiring rival Allco Finance Group Ltd while it was dealing with a cash crunch of its own that ultimately led to the $10 billion financial empire's demise.

Phil Green, the former chief executive of 'mini-Macquarie', told liquidators in the Sydney Federal Court yesterday that Babcock & Brown executives went ahead with due diligence on the deal, thinking the group could rescue the now-defunct Allco.

An email thread shows the board outlining the case for an acquisition despite being in deep talks with lenders, particularly Westpac and Societe Generale, over its own financial health.

In the messages read to court, Michael Larkin, then Babcock & Brown's chief financial officer, "entirely distanced" himself from the potential transactions.

"We are being scrutinised by the banks, the ratings agencies and our equity investors in being compared to Allco," said Mr Larkin's email.

A public scrutiny into the toppled investment bank by its liquidators started in the Federal Court in Sydney on Tuesday.
Babcock & Brown entered administration in March 2009 in the midst of more than $5 billion losses, a plunge from its peak in mid-2007 when it was valued at $13.2 billion.

The Sydney-based investment firm had borrowed massively to acquire infrastructure and property assets to on-sell to third-party investors in funds it managed for a fee.

The first to appear as a witness in the hearing, Mr Green faced intensive questioning by barrister Peter Wood, SC, for Deloitte partners David Lombe and Simon Cathro over Babcock & Brown reporting a $5.6bn impairment, despite having recorded at the June 30 results that its balance sheet impairments and realised losses were just $400m.