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Nye Lavalle
Carlyle Capital Nears Collapse
As Accord Can't Be Reached
March 13, 2008; Page C2
The credit crisis has claimed another victim.

Carlyle Capital Corp. said late Wednesday it expects its lenders will seize its assets, causing the likely liquidation of the fund, which until recently owned $21.7 billion in mortgage securities.

"Although it has been working diligently with its lenders, the Company has not been able to reach a mutually beneficial agreement to stabilize its financing," the fund said in a statement.

The fund's likely collapse would be a major black eye for Carlyle Group, the powerful Washington-based private-equity firm whose executives own 15% of the fund.

Though it's registered in Guernsey, U.K., and trades in Amsterdam, Carlyle Group runs Carlyle Capital out of its New York offices.

The news comes just one week after Carlyle Group began pleading with some of the world's largest banks to hold off on margin calls and the liquidation of its mortgage assets. Several of the lenders, led by Deutsche Bank and J.P. Morgan Chase & Co. ignored Carlyle's request. Wednesday night, they began selling the fund's assets, which were committed as collateral against huge borrowings. By Monday, dealers had sold $5.7 billion of the fund's assets.

The fund said that through yesterday it had defaulted on approximately $16.6 billion of its loans, and expects to default on the rest.

Other dealers that sold Carlyle Capital's collateral included Merrill Lynch & Co. and Bear Stearns Cos., according to people familiar with the fund.

The fund's collapse shows how Wall Street's biggest players have begun playing hardball with some of their best clients. And they reveal how jittery banks have become about their own loan exposures. In the case of Carlyle, 12 banks had lent the fund about $21 billion, or $20 for every dollar of initial capital.

It also illustrates how the credit crunch has moved far beyond subprime mortgages. Carlyle Capital's portfolio consisted exclusively of AAA-rated mortgage backed securities issued by Fannie Mae and Freddie Mac. They are considered to have the implied guarantee of the U.S. government and pay par at maturity.

The fund, which started in 2006, had struggled since last summer. It had to postpone its initial public offering of stock last June just as the credit crunch was first taking hold, and when it did go public in early July was forced to sell its shares at a discount. Only a month after its IPO, Carlyle Group had to extend $200 million to the fund to meet margin calls.

Carlyle Capital's investment strategy looked like easy money at first. The fund would exploit the difference between the interest earned on its investments in mortgage securities and the costs of financing those investments.

Like so many other hedge-fund blowups, Carlyle's troubles came from borrowing too much money. The secret to making money was borrowing massive sums. Carlyle Capital managed only $670 million in client money, but used borrowings to boost its portfolio of bonds to $21.7 billion. Until last week, when the dealers started selling the fund's collateral, it was about 32 times leveraged, a level one mortgage-company analyst called "astronomical."

The leverage, combined with severe dislocation in the credit markets, has proved to be Carlyle Capital's undoing. With their balance sheets under extreme pressure, banks have tightened their purse strings and are now requiring more collateral for loans. And in Carlyle Capital's case, the prices of the collateral -- the residential mortgage backed securities, or RMBSs -- have dropped to levels not seen in more than 20 years. The fund said in its statement late Wednesday that the value of the RMBS collateral continues to drop.

Carlyle Group, founded in 1987 in Washington, D.C., manages some $75 billion across 59 funds. Over the past three years, it has teamed up with other private-equity firms to do some of the largest buyouts in history, including energy company Kinder Morgan Inc., car-rental giant Hertz Corp. and technology outfit Freescale Semiconductor Inc.

Carlyle Capital is run by CEO John Stomber, who also serves as a Carlyle Group managing director. He is a former executive at Cerberus Capital Management LP, a New York private-equity firm, and before that was an executive at Merrill and Deutsche Bank. The fund's chairman, James Hance, was previously a senior adviser at Carlyle and a former finance chief and vice chairman at Bank of America.
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