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The Fed and Carlyle

Robert Peston | 07:13 UK time, Thursday, 13 March 2008

Carlyle Capital Corporation, the leveraged-mortgage vehicle of the famous, eponymous private-equity firm, said over night that it has been unable to stabilise its financing and that its “lenders will promptly take possession of substantially all of the company’s remaining assets”.

Carlyle Capital CorpSo almost within the blink of an eye, a business that had borrowed $21bn from the world’s biggest banks to invest in high-quality mortgage-backed securities will be gone, liquidated, kaput.

Such is the whirlwind blowing through global financial markets.

What’s the damage? Well the equity in the business, about $670m, looks as though it will be wiped out.

In the scale of credit-crunch losses, that’s an “ouch” rather than a “yikes”. The suppliers of that equity include Carlyle’s own partners. They’re a bit poorer than they were.

More worrying is the explanation for why lenders are seizing the assets, which are US government agency AAA-rated residential mortgage-backed securities (RMBS).

Carlyle says: “negotiations deteriorated late on March 12 when, among other things, the pricing service utilized by certain lenders reported a drop in the value of RMBS collateral that is expected to result in additional margin calls”.

That statement will reverberate through global markets today.


Well, the point of Tuesday’s dramatic $200bn intervention by the Federal Reserve in mortgage-backed markets was to stabilise the price of US government agency AAA-rated residential mortgage-backed securities and – by implication – to encourage the big banks NOT to seize assets in the way they’ve been doing at Carlyle.

Right now, it’s not clear that the Fed’s medicine has worked.

In fact, it’s arguable that the banks’ seizure of Carlyle’s $20bn-odd in assets has actually been encouraged by the Fed's mortgages-for-Treasuries offer. Because the Fed’s new lending emergency lending facility allows the banks to swap mortgage-backed debt for Treasury Bills in a way that Carlyle could not do.

So it would be rational for the banks to take Carlyle’s assets and exchange them for top-quality, liquid US government bonds, rather than leave loans in place to a business, Carlyle, whose assets remained highly illiquid.

If that’s the case, there will be some very scared people in hedge-fund land today. Hedge funds that have borrowed from banks against the security of mortgage-backed debt could be about to see their assets sucked into the banking system and their businesses vanish.

It’s a process known as de-leveraging the global financial economy, yet another manifestation of the puncturing of the debt bubble.

Many will see it as a healthy cleaning of the Augean stables. But if it is, it certainly won’t be completed in a day – and, as I’ve said many times, it won’t be painless for the rest of us, because de-leveraging also means they'll be less credit for all of us.

Comments   Post your comment

  • 1.
  • At 08:36 AM on 13 Mar 2008,
  • tonyw wrote:

I have absolutely no sympathy for Carlyle. They thought it was easy money, leverage up to 32 times the money they actually had and then make huge profits. Its always the same story borrow more and more to speculate, it just can't go wrong can it? Well apart from south sea, tulips, Florida land boom, 1929, LTCM......

Its no wonder that Carlyle Group set up CCC as a separate entity.

As you say at the end of the day it will be the general public who suffer by paying more interest so that the banks can make back their losses. I bet the CEO John Stomber is unlikely to be foreclosed.

  • 2.
  • At 08:59 AM on 13 Mar 2008,
  • SteveB wrote:

All this debt mountain was built on confidence, that has now gone. I did not believe pumping money in would work, and so far it has'nt. I think the best thing the Fed could do would be to buy up properties, starting with those that have fallen the most in value, and keep buying until the market stabilizes. Sure they become landlords, but they will be able to sell off as confidence returns, and we all should know, that if they started doing this property prices would halt and everyone would be able to price their loses and start to get back to usual business.

  • 3.
  • At 09:41 AM on 13 Mar 2008,
  • Ian Harris wrote:

Oh dear oh dear!

It couldn't happen to a nicer bunch of people than Carlyle.

  • 4.
  • At 09:55 AM on 13 Mar 2008,
  • Nick Robins wrote:

It's fairly obvious that the money being pumped in by the Fed will be swallowed up by those whose businesses are based on RMBS's it would, in fact, be foolish not to grab the best quality assets in place of anything which is regarded as even slightly poisonous. Expect therefore to see everyone realising this in the very near future with a rash of Hedge funds being closed at a rate of knots.

At $20bn a go a $200bn cake will not take long to disappear and then what?

  • 5.
  • At 09:58 AM on 13 Mar 2008,
  • graham cooke wrote:

Do I detect a paralell with our Government's 100% backing of Northern Rock's deposits? Given that guarantee, the sensible thing for us to do is move all of our bank deposits to the Rock with the potential effect of destabilising the other UK banks.
Perhaps another example of the law of unintended conseqeunces!

  • 6.
  • At 10:06 AM on 13 Mar 2008,
  • Ian Ryder wrote:

To post #2, SteveB

Are you serious? What business is it of them to be interfering directly into the market in that way? They have already tried to manipulate the stock and debt markets it's failed - the forces are too strong so why not just let things happen the way they should. It amazes me how everyone is happy to let the free market be until it all goes wrong then it's socialism all the way!

This bubble should never have happened but it has and now we need the people swept up by it to feel the pain and learn the lesson. It's either that or we pump some more and just have worse later on. As it is we're flirting with another depression because of the US insistence on keeping ever bigger bubbles inflated.

  • 7.
  • At 10:06 AM on 13 Mar 2008,
  • Simon Stephenson wrote:

"What’s the damage? Well the equity in the business, about $670m, looks as though it will be wiped out.

In the scale of credit-crunch losses, that’s an “ouch” rather than a “yikes”. The suppliers of that equity include Carlyle’s own partners. They’re a bit poorer than they were.

Before I get too weepy for Carlyle's partners, I'd like to be sure that they've really suffered a major personal loss through this. For example, I'd want to know:-

1. How much of the $670m capital is actually hard-earned money invested to make a moderate return? And how much is earlier speculative gains which have been solidified as value without full consideration of future contingent liabilities?

2. How much solidified speculative gain has actually been paid out of the fund to investors over the years? It's hard, for example, to feel too distressed for someone's loss of investment if they've enjoyed a 40% pa payout for 5 years. Easy come, easy go, as they say.

  • 8.
  • At 10:07 AM on 13 Mar 2008,
  • SteveZ wrote:

Considering the potential capital impairments that the banks are exposed to, it is no wonder that they are in risk minimisation mode.

Having money backed by ABS's in a hedge fund is inherently risky. It makes perfect sense to minimise risk by transferring it to the FED.

But what is to stop a bank transferring its ABS's to the Fed in exchange for Treasuries and then lending them to a third entity. If that entity then lends to a fourth and the third entity goes bankrupt. Does the Fed get the Treasuries back?

  • 9.
  • At 10:25 AM on 13 Mar 2008,
  • ordinary joe wrote:


  • 10.
  • At 10:36 AM on 13 Mar 2008,
  • william moore wrote:

Again another Robert Preston article .
Precise,easy to understand ,no frills just what non financial types need to keep up with this long running financial worldwide mess.

  • 11.
  • At 10:36 AM on 13 Mar 2008,
  • phil wrote:

It could well be that this is what the Fed intended - deleveraging, and the destruction of the secondary banking system, whilst protecting the core financial system.

  • 12.
  • At 10:55 AM on 13 Mar 2008,
  • J Mac wrote:

this is now getting very serious indeed. We should be worried about the possibility of complete financial meltdown and a return to the 1930s.

  • 13.
  • At 10:56 AM on 13 Mar 2008,
  • John wrote:

Unfortunately, the collapse of these funds is exactly what is going to push the markets over.

6 years of successive growth due to the securitisation and displacement of risk has benefited every single person in Britain through increased credit, cheaper credit, more public spending.

Don't waste your time or bitterness criticising the rich few. We live in age where financial services in the UK are more important for jobs than manufacturing, and this is the equivalent of the 70's again, but with that added component.

My main concern is that systemically I don't think the central banks can sort this out - the only way is for a contraction in markets over a couple of quarters and people re-assessing their business models.

  • 14.
  • At 11:04 AM on 13 Mar 2008,
  • Ben Ingledew wrote:

The parable of the unmerciful servant is playing out in the financial markets.

  • 15.
  • At 11:07 AM on 13 Mar 2008,
  • Martin Packer wrote:

Just another sign that Darling has rose-tinted glasses. I don't believe the whole thing has shaken out or anything like. On the contrary I think this is just beginning.

People are learning that Capitalism is risky. Something we need to be reminded in a big way about - every few years.

  • 16.
  • At 11:08 AM on 13 Mar 2008,
  • Chris wrote:

I think the more interesting point is being missed here, which may explain why the Fed is prepared to take these kind of securities as collateral.

Currently nearly all mortgage and asset backed securities are being marked down significantly in the markets, whether they are wheat or chaff, because they are simply too far removed from the underlying assets and the market has no clue how to value them.

The CCC assets may ultimately realise near their full value, but the market says they are worth much less if sold now and the banks think the CCC equity is worthless, which on paper it is.

You might want to read the recent output from MBIA which insures some of these instruments. They made "Mark to Market" writedowns of $3.9bn in their 2007 accounts but insist that, modelled on "conservative" assumptions, they expect only $200m of realised losses. They expect the remaining write-downs to be reversed as the market returns and the underlying loans are repaid over time.

Most of the cynics on this board will say they are smoking something strong, but they have persuaded the rating agencies to re-affirm their own AAA status (for now). They have also managed to attract $1.5bn of risk capital from one of the largest and most successful private equity firms (Warburg Pincus). Perhaps they will go the same way as Carlyle. But maybe not. Those buying wheat at chaff prices will make huge amounts of money.

  • 17.
  • At 11:25 AM on 13 Mar 2008,
  • Tom Taylor-Duxbury wrote:

Seems to me that no matter what comes along the bankers, borrowers, speculators and snake oil salesmen cannot loose.
The modern system of banks being backed by Govt's in one form or another makes all this smoke and mirror stuff a one way bet for the banks.
Neat trick.
Losers? The average tax payer; whichever way the situation moves he's screwed.
Capitalism is not meant to be like this

  • 18.
  • At 11:40 AM on 13 Mar 2008,
  • antz wrote:


So SteveB, are you a communist now? State control of private assets is OK now is it? China and Russia must be laughing at us right now.

  • 19.
  • At 11:42 AM on 13 Mar 2008,
  • kim wrote:

I don't think that it is an unintended consequence.

First we have to deleverage the system and the only intermediary we can use is the banking system (which provided much of the leverage in the first place). That means helping the banks fund their inflating balance sheets and, maybe, as a quid pro quo forcing them to raise capital even if that hurts existing shareholders.

Only once the system is deleveraged, will other buyers be prepared to buy the "good" assets at sensible prices (until then, the overhang will dissuade them..."don't catch a falling knife").

And then we will see who is solvent.

If we don't deleverage first, then both good and bad assets will be valued the same, and both good and bad banks will fail.

So the Fed is (I think) focussing on facilitating the deleveraging, and Carlyle is part of that process.

No tears for them. They are not part of the Fed's constituency, just rather silly boys.

  • 20.
  • At 11:45 AM on 13 Mar 2008,
  • Sherman McCoy wrote:

It seems that beggar thy neighbour is back en vogue. The US and IMF have been consistently demanding that China allow its currency to appreciate. Since this has not worked it seems an alternative strategy is being pursued- that of allowing a dollar sell-off, hyper-inflation and the subsequent devaluation of US debt.

Moreover, as Naomi Klein has documented in her underrated book 'The Shock Doctrine', we have to ask ourselves which of the interested parties benefit from crises. She has documented how time and time again financial and economic crises in Latin America were exacerbated by policies that any unbiased economist could see would stoke up inflation and currency depreciation. Following such shocks governments could enable ministera and their cronies to asset-strip state resources whilst imposing martial law on their own nationals.

Are we really to believe that the Federal Reserve and the other central banks it has consulted are so stupid, that they are so incompetent that they did not realise that they have given investment banks a cast-iron incentive to call in the loans they have made to hedge funds. How many more times will we buy the line that 'mistakes were made'?

  • 21.
  • At 12:04 PM on 13 Mar 2008,
  • Mike Wilson wrote:

Correct me if I am wrong. Let's say I'm a bank. You deposit a pound and I can lend that pound out 8(?) times (according to Basle rules). The thing is you're a bank too. So, one of the pound(s) I lend out 8 times I lend to you. You, in turn, lend that pound out 8 times and, lo and behold, I borrow one of them. And, so it has gone on. Ad nauseam.

Now, each time the I borrow from you - you say to me 'let's have some collateral' and I say 'how about these mortgages - £100 of mortgages secured against property worth £200'. You say 'excellent, here's your loan.

Now the other way round. It is your turn to borrow from me. I ask for collateral and you say 'How about these mortgages - £100 of mortgages secured against £200 of property.' I say 'great, here's your loan.'

So, the same collateral has been used over and over again for banks to borrow and lend to and from each other. Then someone wakes up - because a few people in the US can't afford their 'liar loan' mortgages - and realises that because the collateral has been used over and over again, now loans worth £500 are secured against property worth £200 (and which is falling every day).

Result - systemic banking collapse. Seems to be a matter of when not if. And the numbers are now way too big for central banks or anyone else to do anything about it.

Northern Rock should have been allowed to go the wall as the first lesson.

  • 22.
  • At 12:28 PM on 13 Mar 2008,
  • Scott wrote:

No matter where the Fed places the deckchairs, the economic Titanic is continuing to fill with water.

Sinking is just a matter of time.

  • 23.
  • At 12:44 PM on 13 Mar 2008,
  • what is going on? wrote:

i really don't understand this stuff. but here goes..

so carlyle has some illiquid securities against which it has borrowed money. now banks would seize these illiquid mortgage backed securities to settle the loans. then swap these securities for treasury bills. what price or swap ratio does the central bank offer for these useless papers against treasury bills?

isn't the whole problem because there is no way to "mark to market" the MBS? so at what valuation is the central bank lending against these securities?

anyway, whats the next step? what would the banks do with the treasury notes? will carlyle buy them back from the banks by using takingnew loans from teh same banks and using the treasury notes it is buying as the security for the loans?

is carlyle and the banks going to hoodwink the fed? i hope after all this cowboy financing the partners of carlyle atleast lose their capital. it should not happen that fed absorbs the loss of the shareholders.

  • 24.
  • At 01:07 PM on 13 Mar 2008,
  • anthony wrote:

SteveB, you are basically saying the Fed should print more money to buy those distressed property. Have you considered what this will do to the rate of inflation. I mean just look at Zimbabwe. The only thing that can cure the problem is for the Fed to let house prices fall to equilibrium, as they do in all free markets. Anything short of that will fail and that is why the increasingly desperate measures have not worked.

  • 25.
  • At 01:13 PM on 13 Mar 2008,
  • Gerald Allport wrote:

I found your comments concerning Carlyle interesting.Setting aside the "Greed Factor"would you care to comment on the possibility of the contagion spreading to other hedge fund positions taken in SMB's particularly in R&D and small specialty manufacturing companies in the biotech/biopharma area as well as other high-tech sectors.
I look forward to reading your future analyses.
My thanks
Gerald Allport

  • 26.
  • At 01:13 PM on 13 Mar 2008,
  • Andrew D wrote:

I'm not an economist but two things stand out here, both of which are a bit worrying:

1.To what extent is the Fed a bottomless pit?
It seems as though the Fed can just print money or issue Treasury Bills to try to ameliorate the problem, and I understand that the Dollar's status as the reserve currency allows them the latitude to do this. But, Robert, surely they can't go on doing this ad infinitum becuase like any other borrower they ultimately have to pay back the loan. The Dollar is already shot and if things carry on this way it will really tank. Will the creditor nations (eg China) be prepared to continue to finance the US and accept security in an increasingly worthless paper currency? I assume that concern over this sort of question is what is driving the gold price?

2.The really scary thing is that we seem to be in no better position than the US but we lack the ability even to print huge quantities of paper money to try to get out of jail because the EU and bond markets wouldn't let us.

Can you reassure me about any of this or should I buy some Gold and bury it my back garden?

  • 27.
  • At 01:13 PM on 13 Mar 2008,
  • Gerald Allport wrote:

I found your comments concerning Carlyle interesting.Setting aside the "Greed Factor"would you care to comment on the possibility of the contagion spreading to other hedge fund positions taken in SMB's particularly in R&D and small specialty manufacturing companies in the biotech/biopharma area as well as other high-tech sectors.
I look forward to reading your future analyses.
My thanks
Gerald Allport

  • 28.
  • At 01:14 PM on 13 Mar 2008,
  • abdul wrote:

i would hazard to say that this is the initial phase of a significant downturn, which follows every period of growth, like night follows day.

guess we will have to get used to more and more bad news from the global economy over the coming twelve months!

  • 29.
  • At 01:19 PM on 13 Mar 2008,
  • jonah wrote:

Perhaps it's not such a bad thing if there is less credit for all of us.

It is abundantly clear that Gordon Brown's "economic miracle" was built on the back of spiralling debt at every level of society. When the debts are called in it will be clear that he, like so many others, were swimming naked (to borrow Warren Buffett's rather graphic analogy).

Perhaps when credit providers insist on criteria over and above an active pulse before lending the exuberant valuations of the last few years will return to normality.

Bottom line - whatever happens is going to hurt someone. Constantly spiralling house prices hurts everybody who doesn't own a house, collapsing house prices hurts those who bought in at the top.

Odds are the government will worry more about the votes of those currently living in overvalued properties than the future unsustainability. After all, if they can defer a crash a couple more years they'll be blaming the Tories for it.

It is amazing just how much the whole business of global business has turned into changing the rules of the game. Certain companies have benefitted from the collapse of Carlyle, certain companies and certain countries too.

I guess the global economy is more like a new game we might call "Global Monopoly" than anyone thought.

And now, with gold at $1000 an ounce, who's to left to bet with me about how many mice will ultimately be caught in that massive mousetrap?

Commodities and especially the ETF ruse is going to rankle some kindred spirits. Look out.

Don Robertson, The American Philosopher

  • 31.
  • At 01:25 PM on 13 Mar 2008,
  • Peter wrote:

Seems Carlyle Capital Corporates initials, CCC, also reflect its credit rating!

  • 32.
  • At 01:46 PM on 13 Mar 2008,
  • Nick Gotts wrote:

The best piece of news I've heard this year! As for "it won’t be painless for the rest of us, because de-leveraging also means they'll [sic] be less credit for all of us", believe it or not Robert, some of us don't live on credit. I'm sorry for those whom the ongoing crunch will cause genuine hardship through no fault of their own, but if the longer-term effect is to put paid to the religious worship of "The Market" (The Market giveth, and The Market taketh away - blessed be the name of The Market), we will all benefit, except the very rich.

  • 33.
  • At 01:53 PM on 13 Mar 2008,
  • Timothy Stroud wrote:

I think it is time the central banks stopped trying to bail out hedge funds and banks who cannot meet their
obligations. They should be allowed to go bust, and that will teach all those masters of the universe who thought they could no wrong an
almighty lesson. There will be plenty of new jobs for liquidators, so that will be good news.

  • 34.
  • At 02:11 PM on 13 Mar 2008,
  • Simon Densley wrote:

SteveB (#2)
One of the vital outcomes of all of this is that property (and other) prices stabilize at a realistic level. If the Fed tries to remove excess supply we will simply be deferring the correction to a later date. I am paying mortgage on a property so I am not trying to be a scare monger pulling down property prices. I do however believe that the bubble in inherently unhealthy and must be removed. At the end of the day nothing comes for free, and property prices need to be allowed to get back to reflecting reality.

  • 35.
  • At 02:15 PM on 13 Mar 2008,
  • Deepak Chawla wrote:

Has FED ever thought if any of the banks goes bust which is rumoured to do so.

It will have all this loss on its books??

  • 36.
  • At 02:26 PM on 13 Mar 2008,
  • Steve B wrote:

I suspect the “banks’ seizure of Carlyle’s $20bn-odd in assets” is more down to Carlyle. I doubt the banks could seize the assets unless Carlyle had failed (i.e. broken covenants, failed to deliver on contracts, etc.).

What the Fed’s move means is that the banks can maintain some liquidity where Carlyle could not. That’s a good thing.

No bad news on the Rock?

  • 37.
  • At 02:27 PM on 13 Mar 2008,
  • John Evans wrote:

Wow - I can't beleive that I am for once agreeing with Robert, and with the other commentors on this article!!!!

Robert you are restoring my faith in you by being able to look through the mud and see that the banks are of course deciding to take their AAA collateral and swap it for treasuries rather than run counterparty risk on a highly leveraged hedge fund.

Another really good suggestion from a commentor - the US government SHOULD begin buying up tracks of property. At the end of the day, it will be able to sell or rent these as time passes, and at least the public is getting something for its money rather than just bailing out banks. It will also put a floor under the housing market, which was and is the root cause of the whole liquidity crisis.

  • 38.
  • At 02:35 PM on 13 Mar 2008,
  • Rob wrote:

SteveB...'I think the best thing the Fed could do would be to buy up properties'.

So we all get to live in a Communist State then!!! NO THANKS. The recession should be allowed to run it's course and the FED should be supporting the Dollar. This would bring back confidence into the US economy more effectively than anything so far attempted. unfortunately the FED are addicted to cheap money.

  • 39.
  • At 02:48 PM on 13 Mar 2008,
  • Cecil Stroker wrote:

just a quick note on post 2 (SteveB) why do you think the Us Tax payer should be paying to allow companies like Goldmans to give their staff a bonus pool ogf some 16 billion dollars. in fact in Goldmans case they should be investigated for defrauding shareholders while all the other companies announced write downs Goldmans told us they were actually positioned to make money from the credit markets and in November announced a record 11.6 billion profit only after bonus were payed they announced in Jan that they will probably be writing assets down 11.1 billion in the 1st quarter 08. how did things change in 2 months or did they know all along and was this just a cynical ploy to get their hands on bumper bonus.

  • 40.
  • At 02:54 PM on 13 Mar 2008,
  • ScottN wrote:

How separate is CCC from the Carlyle Group? Will there now be a problem with the financing of the UK's Defence Research programme, given that a significant part of this has been sold to the Carlyle Group?

  • 41.
  • At 02:55 PM on 13 Mar 2008,
  • Nick wrote:

The collapse of CCC comes on the heels of Peloton where investors
lost $2bn.
CCC has $21.6 bn of assets and $21 bn
of debt. As of 27-2-08, the Annual
Report stated a debt to equity ratio
of 32 to 1. Even the liquidity cushion of 25% of equity had been
suspended by the independent directors.
The company was only floated in 2006
and yet all the investors equity of $600m has been wiped out.
It seems that it was too highly geared and ran out of funds as margin calls were demanded by the banks.

  • 42.
  • At 03:08 PM on 13 Mar 2008,
  • John Pitchford wrote:

It is quite clear that the FED hasn't a clue what it's doing. However, they must know that they are generating inflation by lowering the interest rate and pumping money into the economy. This will hit the small saver badly. Clearly they are quite prepared to bail out the big banks at the expense of the small saver.
Hope the Bank of England doesn't do the same thing.

  • 43.
  • At 04:28 PM on 13 Mar 2008,
  • Kokopelli wrote:


Do you know what that would do to contract law? And the housing market? That idea is so dumb that I just can't believe anyone would think that way.

Why not just have the fed buy all stocks and bonds too?! Then we'll really have free markets, right? Why not just wish for George Orwell's form of government where you are taken care of cradle to grave but have nothing of your own, including hope or freedom.

Great idea! Have the fed own everything and then lease it to you for what ever the market will bear, which is everything you can possible make and then more.

  • 44.
  • At 04:40 PM on 13 Mar 2008,
  • Craig Ross wrote:

I love the idea of the Fed buying houses to "stablize" the market. So people buy assets, if the price goes up they win, if the price goes down we all buy to give them a way out.

Mmmm........some moral hazard there, I think. A nation cannot steal from itself. Houses are not worth what people thought. They do not deliver utility, and hence rent, commensurate with their prices. Nothing can be done. If you bought you were unwise. Asking an agency to act as if it was unwise is...............unwise.

  • 45.
  • At 04:43 PM on 13 Mar 2008,
  • andy hill wrote:

What should Central Banks and Government Treasuries do to stop the rot? Nothing.Let what is not sustainable fail.The 'western' economy will contract to a level where it has real goods output to support personal spending.

It will be painful and cruel but better than a massive tax transfer to a discredited financial services industry and out of control inflation.

Wealth is created by effort,not slights of hand

  • 46.
  • At 04:44 PM on 13 Mar 2008,
  • Alex W wrote:

I'm not sure I agree with this logic - the banks are already long the Mortgage assets through a Repo - the Bank has lent the Hedge Fund cash against the Mortgage asset; the bank now has this Mortgage asset on its balance sheet. Clearly the bank can take that asset and swap it with the the Fed (provided the swap has same term/life as the Repo with the Hedge Fund) for Treasuries anyway under this facility - the new Fed facility doesn't differentiate between who is at economic risk on the underlying asset: the Bank or the Hedge fund. By seizing assets, the Banks simply change the dynamic from being one of them recovering full value on the Repo (the loan) by having recourse to the Hedge Fund's remaining cash/equity to achieving repayment by liquidating collateral (which is the progeny of many "bid lists" currently in the ABS market). It is unusual for seized Repo assets to remain with Banks' as this creates a legal conflict of interest (the borrower will likely claim that they still had residual equity value in the position) in addition to most Repo desks not normally holding outright Economic risk in assets.

  • 47.
  • At 05:10 PM on 13 Mar 2008,
  • Richard wrote:

You may think me cynical but actually perhaps the new central bank lending facilities have been set up just for the purpose of punishing the "hated" hedge funds by providing a home for the repossessed securities - remind me what are these funds supposed to hedge? Ah, of course to provide uncorrelated movements with other markets (whoops mirroring the stock market rather effectively) - a bit like property funds where sold in the same way to a load of unsuspecting investors - another new investment paradigm shot down in full flight.

  • 48.
  • At 05:39 PM on 13 Mar 2008,
  • Yummy Carol Kirkwood wrote:

Am I reading this correctly? The banks are able to swap (effectively) worthless mortgage-backed securities for US Treasuries? In other words, the banks can tranfer the losses they would have had to have taken from those worthless assets to the Federal Reserve? Excellent! Capitalism at its finest!

  • 49.
  • At 05:40 PM on 13 Mar 2008,
  • eric morgan wrote:

Perhaps the Fed is clever. It would rather see a few hedge funds wiped out if that protects the big banks.The banks in effect reclaim any equity or potential future equity from the hedge funds and at least are in control of the assetts.

  • 50.
  • At 06:13 PM on 13 Mar 2008,
  • Dominic wrote:

The people who run it have pocketed millions in bonuses and probably don't care what happens now.

  • 51.
  • At 06:19 PM on 13 Mar 2008,
  • The Man wrote:

The problem with you "Let the market fix it" dreamers is that the powers that be in this country are not going to take this hit. They will find away of taking this scam, which privatized the profits to them and turn it into public (Tax payer) debt. Watch and see.

  • 52.
  • At 06:20 PM on 13 Mar 2008,
  • Yummy Carol Kirkwood wrote:

Am I reading this correctly? The banks are able to swap (effectively) worthless mortgage-backed securities for US Treasuries? In other words, the banks can tranfer the losses they would have had to have taken from those worthless assets to the Federal Reserve? Excellent! Capitalism at its finest!

  • 53.
  • At 06:22 PM on 13 Mar 2008,
  • Paul J. Weighell wrote:

“Many will see it as a healthy cleaning of the Augean stables. But if it is, it certainly won’t be completed in a day – and, as I’ve said many times, it won’t be painless for the rest of us, because de-leveraging also means they'll be less credit for all of us.”

Rather depends on your definition of pain – short, medium or long term? Most adults would prefer low medicinal pain now to high terminal pain later.

If one’s business model is only sustainable on over sold credit rates then the current fight to quality will hurt in the short term as it closes that business but this will assist the rest of us medium term as it removes an ongoing high risk sink for credit from the system releasing that liquidity back to the market where the rest of us can gain from its availability. Remove all the potential bad debts now and the cost is lower than if left to fester…

One hopes that the entire system is moving from high volume, low cost, poor quality lending to lower volume, low cost, high quality lending and this should be much less painful overall or perhaps even pleasurable depending on one’s position !

  • 54.
  • At 06:41 PM on 13 Mar 2008,
  • Jeremiah Harpur wrote:

What is most worrying about these collapses (Carisle, ISTC,etc) is that so little asset value is left in them - technically none. Those who take the biggest hit when the hedge funds and specialist lenders go under are usually the bond hlders who end up with tiny fractions of their assets leftover - if at all. CCC must have been juggling like mad to keep their funds afloat ove rth past few months but once assets are marked down then default recovery demands are made. Normally a fund might expect a little slack and skating on playing short and long expect to overcome temporary valuation problems. What people may not realise is that the hedge funds are no longer as exotic a financial creature as was the case 15 years ago. LTCM went under form all kinds of force majeure reasons unreate to CCC's apparent difficulties. It is anxiety provoking if anoher round of hedge culls is over the horizon. Equities will take a terrible beating. Interestingly quite a number of private investors are going wallop on the back of CFDs which they have used to build up stakes in funds. Anyway that's another topic to chewed on soem otehr time.

  • 55.
  • At 07:14 PM on 13 Mar 2008,
  • Abid Bashir wrote:

It's about time that hedge funds were done away with. They are the cause of most of the present misery in the financial markets and on people's ability to borrow. It's time they were regulated strongly or went the way of the wind

  • 56.
  • At 07:23 PM on 13 Mar 2008,
  • Yummy Carol Kirkwood wrote:

Am I reading this correctly? The banks are able to swap (effectively) worthless mortgage-backed securities for US Treasuries? In other words, the banks can tranfer the losses they would have had to have taken from those worthless assets to the Federal Reserve? Excellent! Capitalism at its finest!

  • 57.
  • At 07:49 PM on 13 Mar 2008,
  • Paul J. Weighell wrote:

Pumping FED funds into a market already bloated with cheap credit seems a dumb move made for political purposes only. If and when things get tough in1929 style that will the time to pump money in but at the bottom end of the working economy where the credit repayment that was most suspect started the rot.

A flood of cheap government sponsored credit now only allows those with marginal business models to stagger on a little further and in an era plagued by the hidden nature of such business models it actually worsens the situation which I would guess is why some sensible banks are calling in dubious loans and ignoring FED sourced credit promises. The plonk at a parties end is never as tasty as the good stuff one started with!

Whether one sees the calling in of credit as painful depends on one’s own ability to meet one’s debts. If one cannot meet them then one’s business model was unsustainable and the rest of us are subsiding that inefficiency which is painful to the rest of us. I am a great believer that pain should fall where it is due and not where it is not due so let’s have short sharp medicinal pain now for badly behaved borrowers please rather than terminal pain later for the rest of us.

  • 58.
  • At 08:20 PM on 13 Mar 2008,
  • Steve B wrote:

So the banks allowed this bunch of cowboys a gearing of about 30 times debt to equity. I think it’s obvious where the risk was don’t, you?
I’ve a feeling they wouldn’t be so generous if I wanted to start a fruit and veg stall.

  • 59.
  • At 09:54 PM on 13 Mar 2008,
  • Chris Cook wrote:


Have you never heard of Hong Kong?

Leasing land is the only way Hong Kong people can occupy property and many commentators think that this fact is one of the key reasons for Hong Kong's economic success.

Why? Because the economic value generated in Hong Kong does NOT mostly go to rentier landlords sitting on their backsides.

The result is essentially a tax on land rental values - which rabid pinko subversives like Milton Friedman considered to be the least worst tax.

ie if you pay the Fed a land rental, you might not have to pay any income how about that for a deal?

  • 60.
  • At 10:03 PM on 13 Mar 2008,
  • John Constable wrote:

I'm not the brightest pea-in-the-pod by a long shot but even I can now see why 'fiat currency' systems are pretty dubious fiscal mechanisms.

The core problem with them seems to be the lack of fiscal discpline that they engender in Government via politicians.

Central banks might inherently wish to act with utmost probity but ultimately they are all answerable to politicians.

So, when a fiscal crisis of this nature periodically occurs, the gut reaction of these players is to print money (physically and electronically).

If they had to match the amount of 'paper' money that they had created with an exchangable commodity, usually gold, then this would act as a great inhibitor of the sort of behaviuor we are now witnessing.

The net effect for us chumps in England, is that the pound in your pocket really is worth less than it was a short time ago.

How Harold Wilson must be smiling down on us from the Scilly Isles in some parallel universe.

  • 61.
  • At 11:51 PM on 13 Mar 2008,
  • Emile Wakefield wrote:


You know what's really going on don't you. Why don't you do what you know to be right, and tell...

There are many many more out there.

So it goes.

The chaos in the financial sector will translate into working people paying for a party they weren't invited to...

  • 63.
  • At 10:15 AM on 14 Mar 2008,
  • SteveB wrote:

I was only trying to offer a way out of this dreadful situation, im not a communist, i do not know federal law, i didnt ask for the fed to buy everything it just seemed to me that this problem has manifested itself because of bad mortgages so instead of giving money to people who lent the money in the first place, buy the properties that have fallen , say, 50pc, this gives a base to the mkt so every bank or mortgage lender can work out what their loses are, as so adjust their balance sheets, then it follows confidence will return and other aspects of the mkt will stabilize. All these people loosing their homes have to live somewhere dont they? I havnt seen anyone give another way out of this mess, most seem to be awaiting the complete collapse, i dont think they fully realize what that will mean, i quick look at the history books about the depression could be in order. All you poo poohers feel free to give your solution.

  • 64.
  • At 12:09 PM on 14 Mar 2008,
  • Sebg wrote:

The FED knows exactly what it is doing, devaluing the dollar in order to reduce the comparable value of US debt with its Asian exporting partners.
The simplest principles apply to what they have done; lower interest rates equals increased inflation; excess cash release equals increased inflation; increased inflation equals devalued currency...
It has been abundantly clear how little this US government cares for the average guy, look at the continuing neglect evident in New Orleans, a third world environment in the western back yard of the biggest economy in the world. Why? Because it does not fit with their goals to action any change or invest in something that it deems as economically unviable.

The FED are playing the game in which they will devalue US debt with other countries, acquire tangible assets at ridiculously reduced cost (which will become evident when they can be marked to market after the dust has settled), and remove some of the weaker hedge funds in a survival of the fittest exercise.
In 12 months time, the massive underwritten losses (guesstimated at the time) will be less than originally projected, and the FED will hold the increased margin in RMBS's, US debt will have been devalued, those hedge funds that have been taking undue risks will have perished, the housing market will have stabilised at a realistic pricing structure in the US, and those countries (such as the UK) will still be spinning in the shockwave from the US led (and managed) global financial crisis.
The impact will manifest itself in destabilising other economies whilst the US recovers quickly. What, in effect, the US government is doing is facilitating the deleveraging process so that it is quick sharp shock of pain followed by stability. The UK is trying to put off the inevitable, e.g. the Northern Rock debacle... Which will translate into a longer battle against the economic inevitability of the market balancing itself.

If we are to meddle in a free market (which is a contradiction in terms!) then help it recentre and find balance, don't try and balance a top heavy, credit loaded economy, as the pain when the inevitable happens will be a lot harsher and last for a lot longer...
We are in for a long ride in the UK, and the pain is coming... So far has been merely a taster...

  • 65.
  • At 12:09 PM on 14 Mar 2008,
  • Chris wrote:

No. 21. You are wrong.

  • 66.
  • At 12:26 PM on 14 Mar 2008,
  • SteveB wrote:

To 6,18,24,34,38,39,43 and 44. Clearly we are looking at this from different directions. I was floating an idea to stop the situation getting worse, you all seem to be rubbing your hands gleeful in the fact that bankers, hedge funds etc are going to get their cumuppence, and to hell the 500 million or so who will also be effected... if thats your view so be it. unchecked this will surely result in a depression as bad or worse that the world saw in 1930,s if you look forward to that, again your choice. it just seemed to me rather than give money to the top end of this pyramid hoping for it trickle down, the answer would be to aid the poor buggers at the bottom who are loosing their home, they have to live somewhere, i guess at the feds expense , so why not become the landlord?. im not a communist 18,38 or see why buying up property would make you one. i dont know contract law 43 you seem to suggest the fed buying property noone wants will cause a problem, appologise i did not know that. 39 i never mentioned allowing fat cats to get bonuses, as you, i would oppose giving money to banks to get them out of their hole. Well ok my idea looks like it wont work, anyone else know how to save the world.... or should we all start getting used to eating roots and living in make shift shelters.

  • 67.
  • At 04:52 PM on 14 Mar 2008,
  • Tony wrote:

It was interesting to see how the poor guy who was deceived by the florida fraudsters today was thought to be a gullible fool. All the banking/hedgefunds who knowingly poured money into totally unsustainable subprime loans are far worse than gullible fools. They risked all with other peoples money.

  • 68.
  • At 07:43 PM on 14 Mar 2008,
  • Nick Gotts wrote:

"it just seemed to me rather than give money to the top end of this pyramid hoping for it trickle down, the answer would be to aid the poor buggers at the bottom who are loosing their home, they have to live somewhere, i guess at the feds expense , so why not become the landlord?. im not a communist" - SteveB

SteveB, I suspect that to a lot of the posters here, suggesting help for the poor, or even that they have to live somewhere, is "communism".

  • 69.
  • At 05:02 PM on 16 Mar 2008,
  • harold mandel wrote:

who are the princepals of the carlyle who were able to leverage the off shore company so highly???????????????

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