Carlyle Fund Seeks Halt to Liquidation

[stubtoe]

Source: New York Times

"LONDON — The Carlyle Group’s troubled mortgage-debt investment fund, Carlyle Capital, said on Monday that it had asked lenders to halt further liquidation of collateral worth as much as $16 billion while the two sides discuss ways to repay debt.

The fund ... has received $400 million in margin calls, and some of its lenders started to liquidate collateral for $5 billion of debt. Banks are asking for their money back amid concerns the economic climate may deteriorate further."



Read more: http://www.nytimes.com/2008/03/10/business/worldbusiness/10cnd-carlyle.html?_r=1&oref=slogin

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Could not have happened to a nicer group. :)

[Donnachaidh]

1. Tough shit Carlyle -- take your lumps like everyone else.

Circle the drain with the rest of them. Couldn't happen to a better bunch.

[CJCRANE]

2. Take 'em down nt

[OKthatsIT]

21. CONGRESS BETTER NOT BAIL THEM OUT..Grrrrrrrr

Let them move to Dubai and beg on the streets!!!!!!!!

[C_U_L8R]

3. Carlyle joins the ranks of Randolph and Mortimer Duke

Put their exchange seats up for sale : - ))))

[HamdenRice]

8. TotaLLY M**F**'ing UNFAIR!!!

for you to make me spit out coffee like that!!!

"Randolph and Mortimer Duke"

:rofl: :rofl: :rofl: :rofl: :rofl:

:rofl: :rofl: :rofl: :rofl: :rofl:

:rofl: :rofl: :rofl: :rofl: :rofl:

[peacetalksforall]

4. Something seems wrong here. What is your opinion of their

successes? If anyone survived this, wouldn't they be the ones? Are they not the movers and shakers - leaders of the pack? Why would they get caught? Are they trying to evade something - or - are they the trigger for the downfall? I just don't think of them as being your run of the mill. There are partnerships between those in political positions and benefactors in the market and industry, but if any group was connected this is it - in fact, they share the driving of our entire direction? So what did they do wrong? Or are they the signal?

[stubtoe]

5. Don't know. I'm just enjoying their misfortune.

Maybe it just goes to show that even the Masters of the Universe are not immune to bad investments.

[natrat]

6. republicans are stupid as shit and only got the money corruptly in the first place?

[crikkett]

7. These guys have the access to rewrite rules but maybe not all of them.

Tomorrow is going to be interesting.

[HamdenRice]

10. Look at it this way

Just because they are part of the Carlyle Group doesn't mean they always know WTF they are doing.

The CG started out as an equity firm that purchased arms manufacturers. That's a nuts and bolts manufacturing business on the one hand, and a political insider business (ie getting govt contracts to make stuff) on the other. Their expertise was hiring former cabinet ministers, presidents, and prime ministers and getting defense contracts.

Their success, which was not based on any particular business competence, but on insider connections, went to their heads. They got involved in creating a hedge fund subsidiary -- the business which according to this report is losing money.

Hedge funds originally were very, very serious shit in terms of competence. Originally hedge funds did one very narrow thing: they used super advanced computer programs to scan the financial markets and make perfectly counter-balanced equal and opposite bets (hedges) on certain debt instruments to exploit inefficiencies in the market. It was almost guarantee-level safe (because it was hedged), unless extremely unusual market conditions prevailed. Unless you were a math PhD, you needn't apply.

I used to hang out with a hedge fund guy at one of my favorite local bars in Manhattan back in the 90s when most people who said they were in hedge funds really were in hedge funds. He was very sweet and looked like Harry Potter grown up. He was a math nerd with a PhD in math and computer programming, and whenever the conversation lulled, he would pull out a napkin and continue solving equations from work. That's the kind of person who was in hedge funds. This particular guy was very nice but like most math geniuses, somewhat, shall we say, socially incompetent.

In recent years, all kinds of idiots have gotten into various financial schemes that they pretend are hedge funds, but aren't. That appears to be the subsidiary business that Carlyle started.

They were stupid, didn't understand the business and have lost their shirts. Good riddance.

[A HERETIC I AM]

11. What makes you think Carlyle Capital is a hedge fund?

Because nothing I have read about them suggests it is. It is a Closed End bond fund, essentially.

[HamdenRice]

13. I jumped to conclusions but I wasn't wrong!

but wasn't basically wrong.

The OP says that Carlyle is having trouble with mortgage backed securities and faces a margin call. By definition, they are engaging in interest rate arbitrage, which is one of the new forms of hedge funds.

In other words, seeing "mbs" and "margin" in the same description made me jump to the conclusion they are a hedge fund.

In the past, when I worked in the mbs sector, mbs were basically considered ultra safe institutional investments. You purchased them to get a slight spread over treasuries. Very safe, very conservative.

But if you see a description of a fund that involves mbs and "margins" then they are engaged in interest rate arbitrage. That's the conclusion I jumped to. After googling, I realize they don't call themselves a hedge fund, but that's what in fact they are -- a hedge fund of the recent stupid kind:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUwbo74M.GkA&refer=home

Started by David Rubenstein in 1987, Carlyle expanded its mortgage investments last year, selling $300 million of shares in Carlyle Capital. The fund used loans to buy about $22 billion of AAA rated mortgage debt issued by Fannie Mae and Freddie Mac, securities that Carlyle says have the ``implied guarantee'' of the U.S. government. Even those bonds have slumped, leading to the failure of hedge funds led by Peloton Partners LLP.

<end quote>

In other words, they raised $300 million, borrowed over $21 billion, and made money off the difference between the interest rate on what they borrowed and the higher interest rate on the mbs. That's interest rate arbitrage, which is one of the things hedge funds do.

That's not the original meaning of "hedge" fund, but that's the stupid kind of fund that has been calling itself a hedge fund the last few years and that has led to much of the financial turmoil.

As the price of the mbs, which is collateral for the loans, declines to below the loans, the lenders to Carlyle call in the loans.

[dixiegrrrrl]

18. ty HR for the info

This is what I like about DU....I can spend less time and get wayyyy more information than I can anywhere else on the web.
Very glad y'all are here.

Kudos....

[peacetalksforall]

16. Thanks, HR - moderation and insight - very interesting.

[Festivito]

22. Poppy left Carlyle years ago, quietly, no forwarding address for his $.

The company borrows a lot, THE BIG GUY LEAVES, then the borrowing fails, the company goes down.

Bush Jr in his second(I think) company left before they told the stockholders they had borrowed money that made their bottom line look good. SEE ABOVE.
(Jr was investigated, but his dad was in charge of the FEC.)

ENRON borrowed, then left leaving the debt to the rest.

The S&L crisis borrowed money, lent it to friends who did not need to repay, then left the taxpayer with the debt.

SEE A PATTERN?

Carlyle acted as a fat ticking bomb at the front door while the bomb maker went to a different buisiness and stole elsewhere.

[plantwomyn]

9. This is what I don't get about this whole thing.

"Some funds were able to buy at least some time from their lenders. KKR Financial Holdings, a publicly traded fixed-income fund linked to the private-equity firm Kohlberg Kravis Roberts & Company, agreed last month with its lenders on an extension to repay debt."

Why don't the mortgage holders do the same? WTF!
Many of these loans were made to homeowners who COULD pay the "starter rate" of interest. Then the mortgage holder raised the rate to an amount they couldn't afford. Why not return the homeowners rate to the affordable amount, or at least renegotiate and raise it only so far as will be affordable, and leave these people in their homes? Why insist on foreclosure when it only reduces EVERYONE'S home values and defaults on the loans? What am I missing?

[A HERETIC I AM]

12. What you're missing is the cost of the money is way above the 1.5% "starter" rates.

The entire loan was not backed by debt that was paying 1.5% to the bond holders. It was backed by debt that averaged WELL above that. The original starter rate is/was nothing more than a sales gimmick. No lender was able to get financing sold at 1.5%. The bonds underlying these mortgages had to have higher yields than that or they would not have been marketable.

[plantwomyn]

14. But could most of those who started at 1.5%

afford say 8.5%. From what I've seen they go from the started rate to 10-20% interest. I couldn't afford that and I think most couldn't either. If nothing else give them a lend/lease option.

[A HERETIC I AM]

15. You would need a Mortgage calculator to figure the answer....

and this website has one;

http://www.fincalc.com/

Click "Consumer Calcs" under the word "Content"

Scroll down to the heading "Home & Mortgage" in the column on the right.

Click on "Comprehensive Mortgage Calculator"

I entered in $250,000 as the loan size on a 30 year loan at 8%. The monthly payment was $1,834.41
I then upped the interest rate by one point - to 9% and the monthly payment went up to $2,011.56

Same loan with a 1.5% interest rate = $862.80
I admit that is not a fair comparison because it seems to me the payment schedule on one of those loans we are talking about is not figured the same way this calculator is figuring it. But the results are probably not too far off. You're hit with this intro or teaser rate and "WOW! I can afford the payments for this huge house!" Yeah....for 6 months (or a year or whatever). Then, of course, your payments go up by a grand a month.

[plantwomyn]

17. Hell, aren't most of these houses starter homes?

No way could I afford to pay $1800 a month.

[dixiegrrrrl]

19. I was talking to a mortgage broker this am

who explained that my lender, Countrywide, added stiff pre-payment penalties to sub prime loans, but no penalties to prime ( "normal") loans..the kind we have with Countrywide.
Why the hell would they add prepayment penalties to loans that were likely to collapse????
But can't talk with Countrywide, that office is gone from this area now.
They still accept our payments at some mail drop, for now.
Guess we are waiting for BOA to send us a letter where to mail the monthly payments beginning next year.

[A HERETIC I AM]

20. The reason they would add those prepayment provisions to the loan contract...

is because it is absolutely critical that the mortgagee continue the payment stream well into the higher interest rate corridor (for lack of a better term) because the only way they can offer the teaser rate is that it will be offset by the higher rate later on.

It's like the "No Payments till 2009" type hype we've all seen advertised for the purchase other big ticket items like TV's or Appliances or Carpeting. If you read the fine print, you're screwed if you don't actually make payments along the way. If you wait until 2009 to start to make payments, you're stuck with paying interest on the money that has accrued for the entire 12 months you thought you were getting away with.

I don't think they looked at it as "Loans likely to collapse". Of course, with much of the unscrupulous qualifying nonsense that has gone on over the last few years, ("How much do you make? "$35,000" "We'll just put $70,000") by the time the loan was written and the mortgage sold and bundled off into the CMO pool, it was too late. Now there is a set of bonds with a par value of $1000 that traders won't pay $600 for. Writ large.

BTW, I guarantee that if you continue to send your payments to the same maildrop, they will go where they have to. The check will be forwarded to the right place, don't doubt it for a second.