Bush family touched by subprime
crisis By F William Engdahl
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. Carlyle Capital Corp
Ltd, a subsidiary of one of the most influential
US 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.
Among the leading
partners of the Carlyle Group in recent years have
been George H W Bush, father of President George W
Bush; James Baker III, the Bush family's attorney
and fixer; and former British prime minister John
Major.
Carlyle Capital reports it is
attempting to convince lenders holding US$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 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%. Carlyle Capital was a
prime example of the financial engineering
encouraged during the Federal Reserve's 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 mortgage 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 derive from so-called subprime 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 subprime 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 that has invested in sectors
as diverse as Libyan oil exploration and Ferrari,
the Italian motor company, paid $1.35 billion for
a 10% Carlyle stake.
And the
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% 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%. 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 capitalism" (Heuschrecke)hostile
takeover binge that triggered a major political
backlash in Germany and elsewhere. That
debt-financed takeover binge came to a halt with
the eruption of the subprime securitization crisis
last autumn. Blackstone has $102 billion in assets
under management at present. The value of
leveraged or debt-financed buyout (LBO) deals
announced in the second half of 2007 plunged
two-thirds from the first six months, according to
data by Bloomberg.
Crisis spreads
to US municipal debt market The
ongoing financial market crisis was nominally
triggered by a crisis of confidence in the value
of the most risky securities, subprime home
mortgages in the US, mortgages often made by banks
without checking the borrowers credit history or
income. Because the securitization revolution was
premised on the flawed illusion that by spreading
risk throughout the global financial system, risk
would disappear, once the weakest part began to
collapse, confidence in the multi-trillion entire
edifice of securitized debt began to collapse.
The process unravels over time, which is
why most have the illusion of a localized crisis.
In reality, centered in the US economic and
financial sector, what is now underway is a crisis
not even comparable to the 1930s Great Depression.
Now the normally high-quality debt of US
local and state governments, so-called municipal
debt, is getting hit. California, New York City
and the owner of the World Trade Center site will
replace their floating rate debt, sharply raising
costs for local governments as the economic
depression is slashing their tax revenues.
In February, interest rate yields on US
tax-exempt municipal debt rose to the highest ever
relative to Treasuries. The market is reacting to
deteriorating finances at bond insurance companies
and credit rating companies. States, cities and
agencies are pulling out of the $330 billion
floating rate or auction-rate market, where costs
have doubled since January, and plan to sell about
$22.5 billion of fixed-rate, tax-exempt bonds to
raise capital at a significant penalty price.
Bond fund managers in New York and London
tell us they have never seen such troubles in the
municipal bond market before.
The market
for floating rate or auction-rate municipal bonds
in the US, once thought safe, entered crisis as
losses tied to subprime mortgage bonds and related
securities threatened so-called monoline bond
insurers' AAA ratings, causing investors to avoid
the bonds they had insured.
The same
monoline insurers, specialized New York financial
security insurance companies, had insured subprime
mortgage securities and municipal debt. The
monoline companies guarantee about half the $2.6
trillion of outstanding state and local government
debt, some $1.2 trillion. Higher interest rate
costs for states and local governments will
aggravate local US fiscal crises as the depression
spreads, creating a self-reinforcing downward
spiral. The process is in its early stages yet.
F William Engdahl is
the author of A Century of War: Anglo-American
Oil Politics and the New World Order, Pluto
Press Ltd. Further articles can be found at his
website, www.engdahl.oilgeopolitics.net.
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