Carlyle Group Underestimates Credit Crisis

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Many people have underestimated the breadth of the credit crisis. Take the Carlyle Group. Before it raised its profile in the private equity world, Carlyle had a shadowy reputation as the private wealth manager for the elite of the world’s military industrial complex. John Major, George Bush the elder, former American-defense Secretary Caspar Weinberger, and a long list of former government officials who’d crossed back into the private sector had money with the Carlyle Group.

This morning we read that a public spin off from the Group, Carlyle Capital Corporation, has US$22.7 billion tied up in mortgage-backed securities. The parent has injected two US$100 million installments into its wayward child.

The naughty Capital Corporation told shareholders it had no subprime exposure. But it did. It said all the exposure was Triple A rated. But it wasn’t. It said liquidity was ample. But it isn’t.

In a letter to shareholders, the Group’s CEO John Stomber said, “We designed CCC’s business model to withstand a liquidity event equal to the events of October 1998, when the demise of Long-Term Capital Management threatened the financial markets. We believe the recent liquidity disruption is significantly worse than the events of 1998.”

It’s another example of models being insufficiently imaginative. Just because it hasn’t happened before doesn’t mean it can’t.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Dan,
    You need to read the whole announcement I think, especially about their level of gearing. One then is immediately struck by the question – How could their robust (LTCM-proof) model be geared at 98% ? Answer – it was never risk averse, let alone LTCM-proof. These claims regarding gearing,and robustness, are mutually exclusive.
    More likely, this announcement, taken as a whole is really Fundistani for : ” we are about to go under. We warned our political clientelle last month, so don’t expect too much agro from that quarter. Meanwhile we will go through the motions with inadequate liquidity injections for the benefit of the punters. Scapegoats for this derivative fiasco have been pre-selected, and we’re are not one of them, hence our arrogant belated advice”.

    Reply
  2. Surprising a well heeled Corporation would not forsee the normal market flucuations.
    The downturn (normal) started about 2005 in some markets and will continue approximately thru 2008-2012.
    Most likely it will be worse than the 1989-1995 slump.

    Wesley Franklin
    August 31, 2007
    Reply
  3. I had to laugh.

    Last week I was in the Gateway building in Sydney seeing my mates at Dimensional (Funds Management).
    Having pressed the wrong button I got off at the wrong floor, to be surprised by 2 burly SWAT fed-pol officers with their glock pistols, baseball caps and running shoes.
    I thought they were there for me, what with my 8yr old downloading all that Crazy Frog stuff off bit-torrent, anyway, I stepped off on the wrong floor- being Carlyle Groups office.
    Great view right over the top of all the APEC stuff. Of course the story didn’t end there, I got back into the lift, pressed the next button, and who’se floor do I got off? You guessed it Basis Capital. So I thought I’d go in and see me my poor suffering mate **** (the salesman)….. “****, where are you” I said on the phone, “I’m getting some chiro work done” All makes sense now. I don’t think I would be sleeping straight either! As part of the bail out package they should offer free Chiro, there might be a few noses and necks out of joint I’d guess. Shame too, they’re all nice guys there, really nice. I guess its just the kind of thing that happens when you own 1/3rd of the market in those kind of securities.

    dubious pete in melbourne
    September 3, 2007
    Reply

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