There goes another illusion shattered.
Hat tip to Paul Kedrosky for pointing out the choice sentence in the story:
The secret to making money was borrowing massive sums.
You don’t say.
Carlyle Capital Corp. said late Wednesday that it expects that its lenders will seize its assets, causing the likely liquidation of the fund. “Although it has been working diligently with its lenders, the Company has not been able to reach a mutually beneficial agreement to stabilize its financing,” the fund said in a statement. [Well, thank heavens they were “working diligently” and not just slacking off.]
The fund’s likely collapse is a major black eye for Carlyle Group, the powerful Washington, D.C.-based private-equity firm whose executives own 15% of the fund [but not a big enough black eye that they felt the need to put up more capital and bail it out]…
The news comes just one week after Carlyle Group had pleaded 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 Deustche Bank and J.P. Morgan Chase & Co. ignored Carlyle’s request. Wednesday night, they began selling the fund’s $21.7 billion in mortgage securities, which were committed as collateral against huge borrowings.
By Monday, dealers had sold $5.7 billion of the fund’s $21.7 billion in assets, which were committed as collateral against huge borrowings.
Other dealers that sold off Carlyle Capital’s collateral included Merrill Lynch & Co. and Bear Stearns Cos., according to people familiar with the fund. But some other dealers who didn’t sell, including Citigroup Inc., had hoped to resolve the fund’s crisis amicably.
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 $21 billion, or $20 for every dollar of initial capital.
[Here’s the really cool part:] It also illustrates how the credit crunch has moved far beyond subprime mortgages. Carlyle Capital’s portfolio consisted exclusively of $21.7 billion of triple-AAA 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. [What could possibly go wrong?]
The secret to making money was borrowing massive sums. Carlyle Capital managed only $670 million in client money, but used borrowings to boost its portfolio of bonds to $21.7 billion. Until the dealers started selling off the fund’s collateral, it was about 32 times leveraged, a level one mortgage-company analyst called “astronomical.”
[Source: Wall Street Journal.]