One of the biggest names in the New York/Washington financial axis was one of
two big industry players to hit the wall this week as their lenders became very
nervous about the collateral they were holding - mostly mortgages or mortgage
The Carlyle Fund is managed by The Carlyle Group, which claims
some of the biggest names in politics serving in the present or past tense as
employees, directors, investors, or advisers. The Fund announced this week that
it had failed to meet margins calls on its $21.7 billion portfolio. A margin
call occurs when a lender fears that underlying collateral is no longer sufficient
to ensure the safety of a loan and calls for the borrower to either provide
additional collateral or pay down the loan.
A margin call is a like a snowball rolling down hill. Once a call is triggered
it takes a disproportionate contribution to shore up the loan because for every
dollar of collateral that is liquidated to pay down the loan there is one dollar
less to securitize the rest. For example, suppose a lender holds $5 worth of
stock as collateral for an $11 loan requiring 50% collateral - $.050 less than
he holds. He calls in the margin and sells $1 in stock, reducing the loan to
$10 but cutting the collateral to $4, only enough to support an $8 loan. It
is indeed a slippery slope.
Carlyle Capital said it had received additional margin calls
and default notices Thursday from banks that help finance its portfolio of residential
mortgage-backed securities and that it was unable to meet the calls from four
Friday the second shoe fell as lenders began to liquidate the securities underlying
the Groups loans. Trading of shares in the listed mortgage-bond fund was suspended.
The stock closed Thursday down almost 60 percent to $5 on the Amsterdam market
where it is primarily listed.
Carlyle Capital said Friday it is in continued discussions with its lenders
about its financing situation, but warned shareholders that the additional margin
calls and increased collateral requirements to keep funding in place could quickly
deplete its liquidity and impair its capital.
According to The Wall Street Journal, Carlyle Capital is well beyond the 50%
requirement for margin support, leveraging its $670 million equity 32 times
to finance a $21.7 billion portfolio of residential mortgage-backed securities
issued by U.S. housing agencies Freddie Mac and Fannie Mae.
Carlyle Capital was initially launched as a private fund in 2006 but it is
its parent company that is much more interesting.
According to its website, "The Carlyle Group, headquartered in Washington
D.C., was established in 1987 as a "private global investment firm that
originates, structures and acts as lead equity investor in management-led buyouts,
strategic minority equity investments, equity private placements, consolidations
and buildups, and growth capital financings."
Among the major players that have, over the years, been closely
associated with the Group are former Secretary of State James Baker, III; former
Defense Secretary Caspar Weinberger; billionaire George Soros; members of the
bin Laden family and, most notably, Carlyle Group Director George H. W. Bush.
The second company, Thornburg Mortgage, Inc also announced
this week that it was facing default as it failed to meet "a substantial number"
of new calls it was facing. Officers said that the Santa Fe, New Mexico company
was trying to sell securities, offer debt, or raise capital but many analysts
were speculating that the company might have no choice but to file bankruptcy.
Thornburg specializes in so-called "jumbo mortgages" those above
the $417,000 conventional lending limit of Freddie Mac and Fannie Mae. The company
has suffered as investors have shied away from such loans in recent months.