Unintended Consequences: Fed Kills Carlyle
The Beeb is not normally my first stop for financial commentary, but Robert Peston has an interesting take on the Carlyle fund and the Fed plan to save the world [again...]
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.
Collateral damage. It makes perfect sense.
The Fed and Carlyle
CCC to D
Carlyle Capital in default, on brink of collapse
March 13th, 2008 at 11:00 am
[...] the Fed inadvertently kill Carlyle Capital? (Alea, FT Alphaville, [...]
March 13th, 2008 at 11:57 am
Unintended? Well, maybe it is unintended.
What I mean is: Does it make sense to the Fed to get business like Carlyle killed in order to have the Big Tigers feeded?
I don’t know.
March 14th, 2008 at 3:30 am
I find it contemptible for anyone to suggest that someone or something else “killed” a fund which levered itself by 32:1.
If I choose to jump off a bridge, is it the fault of the bridge builders, because they built it too high??
March 14th, 2008 at 3:53 am
Don’t see the relation with jumping off a bridge. At 32:1, your destiny is not in your hands, so “someone” can decide to kill you anytime they want, same for an investment bank like Bear Stearns even more levered than CCC. Who is guilty the fund or the banks lending to the fund. You tell me.
March 14th, 2008 at 5:05 am
jck,
The point is, levering your self up by 32:1 is no-one’s fault, but your own. As is jumping off a bridge.
If you’d prefer a different analogy: if I go out and eat 32 Big Macs a day for 2 years, then drop dead from my clogged arteries, should I blame the Big Mac, or maybe the restaurant for my demise? Neither, of course. I’m a consenting adult - I chose to gorge myself.
Similarly, if the restaurant which served me let me eat the majority of those burgers on credit, it’s their own silly fault for taking on a bad risk. They lose, however they did not “kill” me: I did it, myself.
March 14th, 2008 at 5:36 am
Sure, you have take ultimate responsability if you go 32:1 and blow-up, I have no argument with that, in theory. In practice, if you want to lend me money at 32:1 with no meaningful equity from my side, I am going for it and you are irresponsible, not me; I am just gaming the system. What did Carlyle Group lose exactly as opposed to the CCC fund investors. Zilch or close enough.
Carlyle Group was gaming the system, they have little at stake money-wise, the 32:1 can only happen with the active complicity of banks and they, the banks, have a lot at stakes money-wise, once the equity is wiped out, further losses are for them most likely no recourse. So this is not jumping off the bridge but more like being pushed off the bridge entirely at the discretion of the lenders. With 32:1 leverage, the lenders are in charge of your destiny, not you. The Carlyle guys get a bit of a blow to their reputation, but wallets intact.
March 14th, 2008 at 5:59 am
jck,
Well, I guess we’ll have to just agree to disagree. In my view, everyone involved was a consenting adult and they all have to take responsibility for their actions. Everyone was letting it ride, doubling up and letting it ride.
As to how intact the Carlyle guys’ wallets will be after all is said and done…well, we shall see. Everyone thought that the banks’ SIV’s were off-balance sheet, because they had no obligation to support them and bring them back home, if they got into trouble. Turns out, that was wrong.
It will be very interesting to see what (if any) guarantee or recourse arrangements float to the surface in the wash-up of all this.