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erik_kosberg said
 Oil above $110, gold touched $1000 an ounce for the first time ever, the Carlyle Group's huge portfolio is imploding, the dollar dropping like a rock.
And the stock market goes up.  |
Only because S&P is shitting what little remains of their credibility with a forecast that banks have the subprime losses behind them.
We're just ending the first wave of subprime problems. The next wave are a few hundred thousand Option ARM resets that are going to happen between now and mid 2010. Option ARM default rates are projected to be even higher than the subprime default rates of 2006-2007, because these buyers couldn't even qualify for a regular ARM and they bought at the very peak of the bubble.
The drop in real estate values alone is going to put a lot of these borrowers upside down, just like with the first wave of subprimes, but it will likely be worse this time because option ARM's allow borrowers to make a payment below the recommended minimum, with the balance reapplied to the principle. This is the same kind of financing that gets people in trouble with payday loans, only on a massively larger scale. A lot of people bought houses at the peak in 2006 and early 2007 with option ARMs (more than 50% of all mortgages in 2006 in some areas) because that's the only way they could get a payment they could afford, and they expected values to continue rising. If they've made smaller payments they are beyond screwed.
About Carlyle, it's Carlyle Capital that's in trouble. That is a subsidiary of Carlyle Group, but its only a small part of the larger company.
There's still a hell of a story here. From what I read, Carlyle Capital didn't have a lot of junk on its books. Their mortgage holdings were almost entirely made up of conforming loans, which have an implied government guarantee. This is the good stuff. But they're still in trouble because the value of those securities has been dragged down and because Carlyle was ridiculously leveraged. For every dollar of their own they put into the fund, they borrowed $32 more from banks and brokerage houses to buy securities.
And we're talking about billions in margin loans. A number floating around yesterday has Carlyle Capital on the hook to Citi for $4.7 billion, Lehman Bros for three billion, BofA for two billion...all totaled eleven major banks have just under $20 billion in loans to Carlyle Capital. They were unable to work out a repayment agreement, so a couple of days ago Carlyle announced that they were defaulting and the banks would take possession of the assets in the fund.
The problem for the banks will be that those securities, even the government-backed mortgage securities, will be worth a lot less than their face value, and a lot less than the banks loaned Carlyle to buy them. If the loan numbers going around are correct each bank is going to be hit with losses of at least 25% of what they loaned Carlyle. It could top 50%.
And Carlyle Capital is just one of many hedge funds and private equity funds that are in this trouble. Because nearly all are privately held, we won't know what's going on until they sink beneath the waves. The only clue that Carlyle isn't alone is that there has been a flood of high-quality muni bonds come onto the market in the last month from private funds that are trying to raise capital to meet margin calls.
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