Bush family private equity fund in deep trouble as Financial Tsunami rolls on

Global Research, March 10, 2008

Carlyle Capital Corp. Ltd., a subsidiary of one of the most influential USA private equity funds and closely tied to the Bush family, is in default on several of its securities. Carlyle is an offshore subsidiary of the Washington-based Carlyle Group, one of the most politically powerful private equity firms of the past two decades. The severity of its liquidity problems indicates that the unfolding financial crisis is taking major parts of the US financial and political elite down with it. Among the leading partners of the Carlyle Group in recent years have been George H.W. Bush, father of the President; James Baker III, the Bush family’s attorney and ‘fixer;’ former UK Prime Minister John Major.

Carlyle Capital reports it is attempting to convince lenders holding $16 billion in securities not to liquidate the company's remaining collateral. The company is a listed mortgage-bond fund managed by the Carlyle Group. The Carlyle Group already has loaned Carlyle Capital $150 million to cover debt obligations since July 2007. In the past several days it failed to meet margin calls with four banks. The fear in the market according to informed reports is that its entire portfolio, recently valued at $21 billion, could be sold off in a distress sale, putting major downward pressure on all mortgage bonds globally. A collapse at Carlyle would hit the value of all fixed-income securities, which have already dropped sharply as banks pull back on their lending, and force a new global round of asset sales.

Margin calls

In the past days Carlyle Capital had admitted it had received "substantial additional margin calls and additional default notices from its lenders." It said lenders are selling off securities held as collateral. Margin calls are demanded when a creditor questions the ability of the borrower to repay.

Shares in the fund, which trades on Euronext Amsterdam, have been suspended after closing down nearly 60 percent. Carlyle Capital was a prime example of the financial engineering encouraged during the Alan Greenspan era by Washington. It had leveraged $670 million in equity by an alarmingly high 32 times to finance a $21.7 billion portfolio of highly rated mortgage-backed securities issued by US housing agencies Freddie Mac and Fannie Mae. To finance the deals it entered into repurchase agreements with banks where it posted the mortgage securities as collateral in exchange for cash. If the value of the security held as collateral falls, the lender has the right to ask for more collateral — a "margin call" — to secure the loan.

If the borrower does not meet the margin call by putting up more collateral, the lender may sell the security.

More worrisome is the fact that the Carlyle crisis does not owe to so-called sub-prime or bad grade mortgage debt. The company held US government agency AAA-rated residential mortgage-backed securities (RMBS). Now Carlyle’s lenders have issued margin calls in excess of $400 million. At the onset of the sub-prime crisis in September 2007 Carlyle was forced to go to Abu Dhabi’s sovereign wealth fund to get capital. Mubadala, the arm of Abu Dhabi which has invested in sectors as diverse as Libyan oil exploration and Ferrari, the Italian motor company, paid $1.35bn for a 10% Carlyle stake.

And Blackstone Group too?

Carlyle is by no means the only elite US private capital group in serious trouble. Blackstone Group, manager of the world's largest buyout fund, said fourth-quarter profit plunged 89 percent after a ``meltdown'' in the credit markets and warned that getting loans for takeovers will be difficult in 2008. Profit declined to $88 million from $808.1 million a year earlier.

Blackstone decided to list the private equity company on the stock market in June 2007 in a move some date as the last gasp of the huge securitization and private equity buyout mania of the past decade. Since June its stock has fallen 53 percent. More serious, it hasn't completed a takeover of more than $2 billion in five months and is struggling to close the $6.6 billion buyout of Dallas-based Alliance Data Systems Corp., a credit-card processor, announced in May 2007.

Blackstone and Carlyle led the recent “locust capitalismâ€