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
- G. Allen Andreas - Chairman of the Archer Daniels Midland Company
- Daniel Akerson - company director
- Joaquin Avila - investment banker
- Laurent Beaudoin - CEO of Bombardier (1979-)
- Paul Desmarais - Chairman of the Power Corporation of Canada
- Arthur Levitt - former Chairman of the U.S. Securities and Exchange Commission
- Karl Otto Pöhl - former President of the Bundesbank
- Olivier Sarkozy (half-brother of Nicolas Sarkozy, President of France) - co-head and managing director of its recently launched global financial services division, since March 2008 .
Politics and public service
- James Baker III, former United States Secretary of State under George H. W. Bush, Staff member under Ronald Reagan and George W. Bush, Carlyle Senior Counselor, served in this capacity from 1993 to 2005.
- George H. W. Bush, former U.S. President, Senior Advisor to the Carlyle Asia Advisory Board from April 1998 to October 2003.
- George W. Bush, current U.S. President. Was appointed in 1990 to the Board of Directors of one of Carlyle's first acquisitions, an airline food business called Caterair, which Carlyle eventually sold at a loss. Bush left the board in 1992 to run for Governor of Texas.
- Frank C. Carlucci, former United States Secretary of Defense from 1987 to 1989; Also, former Princeton wrestling partner of former US Secretary of Defense, Donald Rumsfeld. Carlyle Chairman and Chairman Emeritus from 1989 to 2005.
- Richard Darman, former Director of the U.S. Office of Management and Budget under George H. W. Bush, Senior Advisor and Managing Director of The Carlyle Group from 1993 to the present
- Allan Gotlieb, Canadian ambassador to the United States (1981-89) and member of Carlyle's Canadian advisory board.
- Liu Hong-Ru, former chairman of China's Securities Regulatory Commission
- William Kennard, Chairman of the U.S. Federal Communications Commission (FCC) under President Bill Clinton, Carlyle's Managing Director in the Telecommunications & Media Group from 2001 to the present.
- Arthur Levitt, Chairman of the U.S. Securities and Exchange Commission (SEC) under President Bill Clinton, Carlyle Senior Advisor from 2001 to the present
- Peter Lougheed - Premier of Alberta (1971-85)
- John Major, former British Prime Minister, Chairman, Carlyle Europe from 2002 until 2005
- Frank McKenna, Canadian ambassador to the United States and former member of Carlyle's Canadian advisory board
- Mack McLarty, White House Chief of Staff under President Bill Clinton, President of Kissinger McLarty Associates, Carlyle Senior Advisor from 2003 to the present
- Anand Panyarachun, former Prime Minister of Thailand (twice), former member of the Carlyle Asia Advisory Board until the board was disbanded in 2004
- Randal K. Quarles, former Under Secretary of the U.S. Treasury under President George W. Bush, now a Carlyle managing director
- Fidel V. Ramos, former president of the Philippines, Carlyle Asia Advisor Board Member until the board was disbanded in 2004
- Dan Senor - political consultant
- Thaksin Shinawatra, deposed Prime Minister of Thailand, former member of board, who resigned on taking office in 2001
- Luis Téllez Kuenzler, Mexican economist, current Secretary of Communications and Transportation under the Calderon administration and former Secretary of Energy under the Zedillo administration.
- Norman Pearlstine - editor-in-chief of Time (1995-2005)