We’re beginning to see some of the first casualties on Wall Street of this economic disaster. Ironically, it’s the Bush family’s own banker, the Carlyle Group.
Carlyle Group said creditors plan to seize the assets of its mortgage-bond fund after it failed to meet more than $400 million of margin calls, heightening concern about a lending freeze that led to a plunge in the dollar and global stock markets.
Concern about the fate of Carlyle Capital Corp., which began to buckle a week ago from the strain of tumbling home-loan assets, helped push the dollar to a 12-year low against the yen today. The fund said in a statement that it defaulted on about $16.6 billion of debt as of yesterday. Lenders will “promptly” take over all of its remaining assets after it failed to reach an agreement with lenders, Carlyle Capital said. Any remaining debt is expected to go into default “soon,” the fund added.
The fund plunged as much as 95 percent in Amsterdam trading. Carlyle Group, co-founded by David Rubenstein, tapped public markets for $300 million in July to fuel the fund just as rising foreclosures caused credit markets to seize up. In the past month, managers led by Peloton Partners LLP have closed at least a dozen funds, sold assets or sought fresh capital as banks tightened lending standards.
“If Carlyle’s lenders want their money right away, they’ll liquidate the fund,” said Hank Calenti, a London-based analyst at RBC Capital Markets. “That will put pressure on already stressed credit markets.”
Yet another fund down, this one to the tune of a few hundred million in margin calls. It’s no big deal, a few hundred million here, a few hundred million there…pretty soon you might be talking about actual money.
The fund’s losses were caused by “excessive leverage,” said Arthur Levitt, a senior Carlyle adviser, in a Bloomberg Radio interview today. “This did not affect the overall Carlyle enterprise,” said Levitt, former chairman of the Securities and Exchange Commission and a board member of Bloomberg LP, the parent of Bloomberg News.
“This was a single fund, and I suspect as this plays out, you are going to see a lot of other private-equity companies, a lot of banks, going down the same road,” he said.
Carlyle Capital’s plea for refinancing on residential mortgage-backed securities failed late yesterday after a pricing service used by some lenders reported a decrease in the value of the assets, the firm said.
“The basis on which lenders are willing to provide financing against the company’s collateral has changed so substantially that a successful refinancing is not possible,” Carlyle said in the statement. It expects additional margin calls today of $97.5 million.
So the fund’s belly up, but it’s no big deal, right? Carlyle has billions, just like all the other big mega financials. Why am I wasting your time with this?
Carlyle Group and its funds are not liable for repurchase agreements that Carlyle Capital used to buy residential mortgage-backed securities, Hong Kong-based spokeswoman Dorothy Lee said in an e-mail today. “The Carlyle Group’s only material financial exposure to CCC is through a $150 million unsecured subordinated revolving credit agreement with CCC,” she said.
“At this point we are exploring all options” for Carlyle Capital, Emma Thorpe, a spokeswoman for Carlyle Group in London, said in a telephone interview. She declined to specify the options being considered.
Carlyle’s fund has said its so-called agency debt has an “implied guarantee” from the U.S. government.
Ding ding ding! You just bailed out this fund’s creditors. Congrats! Even better, there’s plenty more funds that are going under, and that means more and more individual fund bailouts on the taxpayer tab.
Pretty soon you’re talking about real money here.
“This is not only a problem for Carlyle,” Jochen Felsenheimer, the Munich-based head of credit strategy at UniCredit SpA, wrote in a note to clients today. “We expect a further flood of downgrades especially of higher-rated securities, putting enormous pressure on the system.”
Meanwhile, over in Mortgage Gulch, things are looking pretty grim as the February foreclosure numbers continue to be brutal.
U.S. home foreclosure filings jumped 60 percent and bank seizures more than doubled in February as rates on adjustable mortgages rose and property owners were unable to sell or refinance amid falling prices.
More than 223,000 properties were in some stage of default, or 1 in every 557 U.S. households, Irvine, California-based RealtyTrac Inc., a seller of foreclosure data, said today in a statement. Nevada, California and Florida had the highest rates.
“With declining prices, there is a pervasive problem of not being able to refinance or sell,” said Susan Wachter, professor of real estate at the University of Pennsylvania’s Wharton School in Philadelphia. “I’m very concerned.”
About $460 billion of adjustable-rate mortgages are scheduled to reset this year and another $420 billion will rise in 2011, according to New York-based analysts at Citigroup Inc. Homeowners faced higher payments as fourth-quarter home prices fell 8.9 percent, the biggest drop in 20 years as measured by the S&P/Case- Shiller home price index.
“This is continuing to worsen,” Wachter said in an interview. “It tells us that we are not at a bottom.”
Foreclosure filings are likely to be “explosive” in May and June as more payments jump, after remaining at current levels this month and next, Rick Sharga, executive vice president of RealtyTrac, said in an interview. There may be between 750,000 and 1 million bank repossessions in 2008. Bank seizures rose 110 percent in February from a year ago, he said.
The carnage continues and will continue for the forseeable future. Remember, equity collapse = economic ruin, and that’s reflected in the February sales figures.
U.S. consumers cut spending in February and the labor market continued to weaken, suggesting the household-spending pillar that had supported the economy’s expansion may be giving way.
You think? Pillars give way and the things underneath get crushed, you know.
Retail sales unexpectedly plunged 0.6 percent last month, while the ranks of workers remaining on state unemployment benefit rolls hit the highest level in nearly 2-1/2 years in the final week of February, government reports on Thursday showed.
Now the growing credit crunch that has wreaked havoc on Wall Street is settling in on Main Street.
Consumers, who fuel roughly two-thirds of economic growth, held back on spending in a wide range of areas amid surging food and energy costs and a decline in wealth as their home values tumbled.
“This is a downward spiral consistent with a recession,” said Kurt Karl, chief economist at Swiss RE in New York.
“Because consumer prices are so elevated, we’re seeing the hits on the consumer. They can’t finance it and we’ve got a credit market crunch.”
Unexpectedly tumbled? I expected it. Maybe I should be an economist. High prices equal lower demand. Lower demand equals lower sales. Lower sales means a consumer-driven economy no longer has consumers who can afford to drive it.
Inflation now, deflation later. People are wondering how we’re going to get to deflation from what appears to be a hyper-inflation situation, and have said so in recent comments on my posts.
The answer is that with 70%+ of our GDP derived from consumer spending, when that drops due to inflated prices, those prices will start going the other way. When the hyper-inflation bubble bursts, the massive correction the other way will lead to deflation.
Joe Consumer is the engine that drives the global economy. Without equity, without savings, without credit, he’s tapped out. If he’s not buying computers or plasma TVs or a brand new toilet, the manufacturers (foreign) that provide those products are going to suffer.
As they suffer, they will have to lower prices to compete…but that becomes increasingly difficult as inflation pushes the dollar lower. China’s yuan is terribly undervalued because it’s pegged to the dollar. As it collapses along with the dollar, China runs into massive inflation which will lower demand there as people buy less, spend less, and make less. Jobs will be lost, factories will close, and demand will decrease for all the raw materials China is gobbling up.
If China decouples the yuan from the dollar, Chinese import prices will skyrocket, further decreasing demand. Eventually that hyper-inflation bubble bursts and the deflation cycle sets in. It’s just a question of when and how badly this happens.
And with oil at $111 and rising, when that bubble pops it’s going to wipe out trillions.
Whoever is the next president will be too busy trying to keep this economy afloat to do much of anything else.