Thursday, March 13, 2008

Even Big Boys Cry!

WSJ: Carlyle Capital Corp. said late Wednesday it expects its lenders will seize its assets, causing the likely liquidation of the fund, which until recently owned US$21.7 billion in mortgage securities. The fund's likely collapse would be a major black eye for Carlyle Group, the powerful Washington-based private-equity firm whose executives own 15% of the fund. Though it's registered in Guernsey, U.K., and trades in Amsterdam, Carlyle Group runs Carlyle Capital out of its New York offices. Early Thursday in Amsterdam, the shares plunged 70% to US$0.83 each. The stock has lost around 83% since the company first disclosed its funding problems last week.

The news comes just one week after Carlyle Group began pleading with some of the world's largest banks to hold off on margin calls and the liquidation of its mortgage assets. Several of the lenders, led by Deutsche Bank and J.P. Morgan Chase & Co. ignored Carlyle's request. Wednesday night, they began selling the fund's assets, which were committed as collateral against huge borrowings. By Monday, dealers had sold US$5.7 billion of the fund's assets. The fund said that through yesterday it had defaulted on approximately US$16.6 billion of its loans, and expects to default on the rest. Other dealers that sold Carlyle Capital's collateral included Merrill Lynch & Co. and Bear Stearns Cos., according to people familiar with the fund.

The fund's collapse shows how Wall Street's biggest players have begun playing hardball with some of their best clients. And they reveal how jittery banks have become about their own loan exposures. In the case of Carlyle, 12 banks had lent the fund about US$21 billion, or US$20 for every dollar of initial capital. It also illustrates how the credit crunch has moved far beyond subprime mortgages. Carlyle Capital's portfolio consisted exclusively of AAA-rated mortgage backed securities issued by Fannie Mae and Freddie Mac. They are considered to have the implied guarantee of the U.S. government and pay par at maturity.

Carlyle Capital's investment strategy looked like easy money at first. The fund would exploit the difference between the interest earned on its investments in mortgage securities and the costs of financing those investments. Like so many other hedge-fund blowups, Carlyle's troubles came from borrowing too much money. The secret to making money was borrowing massive sums. Carlyle Capital managed only US$670 million in client money, but used borrowings to boost its portfolio of bonds to US$21.7 billion. Until last week, when the dealers started selling the fund's collateral, it was about 32 times leveraged, a level one mortgage-company analyst called "astronomical." The leverage, combined with severe dislocation in the credit markets, has proved to be Carlyle Capital's undoing. With their balance sheets under extreme pressure, banks have tightened their purse strings and are now requiring more collateral for loans. And in Carlyle Capital's case, the prices of the collateral -- the residential mortgage backed securities, or RMBSs -- have dropped to levels not seen in more than 20 years. The fund said in its statement late Wednesday that the value of the RMBS collateral continues to drop.

Comments: Why Carlyle? Its newsworthy because of the people behind the company. Just look at the list below. Unfuckingbelievable. Connections seemingly can only get you so far.

Notable current and former employees and affiliated persons


Politics and public service


p/s photo: Isabella Leong


The Rock said...

I suppose Greed is present in every man. And it is amazing how greed can drive us to make stupid decisions that seemed WISE just months ago. Now it just prove to the world that Americans are not that smart afterall be it the politicians or wall street bankers & fund managers. We are equal after all-kinda nice to see them fall once in a while...

I always believe that leverage should be used only in limited ways - not to be too greedy.

It is kind of like buying call warrants with premium of 20% and only 3 months to expiry in a bearish market. I hope someone will start issuing Put warrants soon.

The Rock

pureland said...



Stocks rally back on hopes write-downs nearly over
Markets stumbled earlier as fund said it's close to collapse; dollar hits lows
By Nick Godt, MarketWatch
Last update: 4:31 p.m. EDT March 13, 2008Print E-mail RSS Disable Live Quotes
NEW YORK (MarketWatch) -- U.S. stocks rallied back from steep losses Thursday, with the Dow industrials recovering from a 235-point drop, after Standard & Poor's suggested banks might be finished with the bulk of write-downs linked to bad home loans.
The report helped the market recover from losses sparked by the potential collapse of a fund owned by Carlyle Group and another weak report on retail sales, which fueled concerns over recession.
"We started today with really bad news," said Paul Mendelsohn, chief investment strategist, at Windham Financial Services. "Then S&P came out with their report about being near an end to the subprime crisis. Who knows? We were deeply oversold and ready for a bounce, the S&P report was a trigger."

pureland said...


End of subprime write-downs in sight, S&P says
Subprime mortgage-related hits may reach $285 bln, rating agency estimates
By Alistair Barr, MarketWatch
Last update: 4:27 p.m. EDT March 13, 2008
SAN FRANCISCO (MarketWatch) -- The end of subprime mortgage write-downs by big banks and brokers may be in sight, rating agency Standard & Poor's said on Thursday.
The global financial-services sector may end up writing down the fair value of such exposures by $285 billion, mainly from residential mortgage-backed securities and more complex vehicles known as collateralized debt obligations (CDOs), S&P estimated.
That's up from a previous estimate of $265 billion published earlier this year, the agency noted.
"The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation write-downs of subprime" asset-backed securities, Standard & Poor's credit analyst Scott Bugie said in a statement.
Banks and brokers, including Merrill Lynch (MERMerrill Lynch & Co., Inc have written down mortgage-related exposures by tens of billions of dollars in recent months. That's sparked a wider credit crunch in which these firms and rivals have pulled back from providing loans and other support to many market participants. That led to forced selling by hedge funds and other market players, pushing prices even lower.
'The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation write-downs of subprime' asset-backed securities.
— Scott Bugie, Standard & Poor's.
Most of the write-downs on subprime securities may be behind the banks and brokers, many of which unveiled big losses in their full-year 2007 results, S&P explained on Thursday.
"Based on available information, we believe that the largest players can be seen as having undertaken a rigorous valuation methodology to come up with conservative valuations," S&P analyst Tanya Azarchs said.
The S&P news sparked a major rally in most U.S. indexes late Thursday, with the S&P 500 climbing more than 1% on the news and the Dow Jones industrial up more than 100 points to 12,122.78 after a dip earlier Thursday.

Salvatore_Dali said...


Bow said...

Carly group major shareholders are butch of former heavy weight republican senators n ministers, it is one of the most politically connected corporation in USA, they can get almost every deal done in Washington corridor of corrupt power.It is in fact great news to see them fall from wall street into main street, average guy win once a while is good.

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