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http://www.telegraph.co.uk/money/main.jhtm...ncarlyle107.xml

Carlyle Capital issues new warning
By Ambrose Evans-Pritchard
Last Updated: 8:49am GMT 07/03/2008
Carlyle Capital
warned today that more securities may be liquidated
by its lenders in a move that threatens its capital.
The fund, which is an affiliate of the private equity giant Carlyle Group, said that the new margin calls could "quickly deplete its liquidity and impair its capital".
Carlyle Capital yesterday said it had missed margin calls to seven creditors and lacked collateral to cover its trading exposure to mortgage securities.
advertisementThe news sent shockwaves through the financial markets. Carlyle Capital has leveraged itself to the hilt, taking out debt at a ratio of 32:1 to invest in the US mortgage assets. It held securities worth a $21.7bn (£10.8bn) last month, raising the spectre of distress sales on a scale large enough to trigger a cascade of liquidations by other funds.
The Dow Jones Industrial Average slumped 214.5 points to 12,040. The FTSE 100 and markets across Europe also opened lower.
Fears of forced sales ravaged real estate investment trusts, which also own big holdings of Fannie Mae and Freddie Mac debt. Anworth Mortgage shares plunged 24pc and Capstead Mortgage was off 25pc.
Thornburg Mortgage crashed 60pc after revealing an SEC-filing in New York that it had missed a $28m margin call to JP Morgan Chase. It has suffered from the collapse in investor demand for so-called jumbo mortgages.
An analyst report that
UBS was engaged in a "fire-sale" of mortgage securities
worth $24bn accelerated the flight from risk. Most of the assets are alleged to be Alt A securities, the next notch up from sub-prime.
Traders said Carlyle had been scooping up AAA-rated mortgage securities, believing that they had fallen fall below inherent value. The risky bet - known as "catching a falling knife" - appears similar to the strategy that ensnared the UK hedge fund Peloton Partners, which was forced to close a $2bn fund last week.
The assets were issued by Fannie Mae and Freddie Mac, federally-chartered bodies that have an implicit US government guarantee.

All we can do now is laugh in the face of adversity. They said we will never have another depression because the markets are so much more sophisticated these days. Um-hum just like WW1 was the war to end all wars as people were so much more sophisticated today.

I said a few months ago that only 10% or so of the bad news was out and noted how the financial commenators on Gloomberg were all saying the same thing: "We don't know...."

Well, the poisons are all hatching out at once now.

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Carlyle Capital has leveraged itself to the hilt, taking out debt at a ratio of 32:1 to invest in the US mortgage assets. It held securities worth a $21.7bn (£10.8bn) last month, raising the spectre of distress sales on a scale large enough to trigger a cascade of liquidations by other funds.

So - If I have this right - they have put in around $700 million of their own cash and borrowed $21 billion to buy these things.

So a 3.5% drop in the securities wipes them out completely.

Is that right? And if it IS right.. how on earth is it allowed?

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So - If I have this right - they have put in around $700 million of their own cash and borrowed $21 billion to buy these things.

So a 3.5% drop in the securities wipes them out completely.

Is that right? And if it IS right.. how on earth is it allowed?

That would NEVER happen. House prices only ever go :lol:

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So - If I have this right - they have put in around $700 million of their own cash and borrowed $21 billion to buy these things.

So a 3.5% drop in the securities wipes them out completely.

Is that right? And if it IS right.. how on earth is it allowed?

nobody care when its going up.

the wonder of leverage in a falling market - over leveraged buy to let speculaters are about to be wiped out

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Shouldn't we all pool our STR funds and offer it to the City are a very decent rate above the base?

Can someone explain to me in dummies speak what this fund is exactly and why it crashing is bad? Basically, the same question as fluffy but a really numpty can understand answer please.

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nobody care when its going up.

the wonder of leverage in a falling market - over leveraged buy to let speculaters are about to be wiped out

slightly off topic

the share price of some high street banks has fallen nearly 50% from peak. I have seen evidence somewhere of bank stocks usually leading the markets down (50% falls in the FTSE expected?). I cant remember where i saw this though - can anyone else or have i dreamt it.

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Shouldn't we all pool our STR funds and offer it to the City are a very decent rate above the base?

Can someone explain to me in dummies speak what this fund is exactly and why it crashing is bad? Basically, the same question as fluffy but a really numpty can understand answer please.

i just thought it was an investment fund. raise c.$300m from investors get a bank to put in another 31x$300m as a loan and buy AAA securities. the bank is the dumb one for lending to a company with such massive leverage. i udnerstand this company was only set up in july 07 - timing eh, who said it was luck.

i wonder whether the banks giving the loans to carlyle were the same as the sellers of the AAA securities? anyway it doesnt matter.

what is interesting is even government sponsored AAA fannie and freddie are feeling the pinch. they were reported as trading at 98% of value yesterday on cnbc so i wonder whether they will continue to deteriorate?

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That would NEVER happen. House prices only ever go :lol:

:lol: not only where they not wearing trunks they were also having a p*ss and playing with themselves when this particular tide went out :lol:

(sorry, horrible image I know)

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Very very roughly speaking this is how these funds work. Note everything is just fictional figures but it gives you an idea of how this works.

I set up a fund called "Super Duper Wicked Return Investment Fund"

I stick a couple of million in it from my own pocket.

I convince friends in the city that I used to work with to stick millions in as well.

With 50 Million of investment I go talk to largeand small investment funds to invest in this super return fund and manage to secure 300 million in actual investment (real real money)

I then go to a credit line (perhaps a large investment bank, or more commonly several investment banks) and borrow more money based on the fact I have a 300 million deposit. This allows me to borrow 9 times that investment at lets say 4% interest.

Dodgy Banks are Us, lend out mortgages of lets say 3 billion at 5.5% to homeowners. Now obviously they don't have 3 billion to lnd out they need to borrow the money. They package it up into there AAARated Mortgage Backed Security Package.

I take my 3billion in investment capital and buy this AAA Rated Mortgage Backed Securities (Basically imagine NR packaged up all there mortgages from there client base and sold them to me) and these securities are at 5%. So Dodgy banks are us are still creaming a nice 0.5% off the 3 Billion pie, and I am making 1% off my 3billion pie.

Now heres the leverage.

My fund makes 1% net of 3 billion. Doesnt sound like much. But I have only actuall invested 300 Million in this so my actual return is 10% on my initial investment!!!!! Holy cow thats fantastic. In a nutshell this is what has driven the market. Leveraged funding.

Of course there is a down side, but houses only ever go up!

Suddenly a few of the Joe's that borrowed money cant pay the mortgages. So a few defaults. But as the default rate on the mortgages goes up and the value of the assets (housing) that this is all backed by goes down the whole leveraged situation works against you.

Essentially this is how it works, in reality its more complex as the securities are rolled up from many tranches of mortgages, some low risk some high risk and this is where it all went wrong.

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I then go to a credit line (perhaps a large investment bank, or more commonly several investment banks) and borrow more money based on the fact I have a 300 million deposit. This allows me to borrow 9 times that investment at lets say 4% interest.

Dodgy Banks are Us, lend out mortgages of lets say 3 billion at 5.5% to homeowners. Now obviously they don't have 3 billion to lnd out they need to borrow the money. They package it up into there AAARated Mortgage Backed Security Package.

I take my 3billion in investment capital and buy this AAA Rated Mortgage Backed Securities (Basically imagine NR packaged up all there mortgages from there client base and sold them to me) and these securities are at 5%. So Dodgy banks are us are still creaming a nice 0.5% off the 3 Billion pie, and I am making 1% off my 3billion pie.

the banks were dumb. look at what the banks have done in your example.

1. earn small fee (0.5%) for writing the mortgages (before being sold into fannie/freddie and then repackaged as AAA) - this covers admin costs

2. earn 4% on the loans. these loans were effectively 97% LTV (based on 32x leverage).

the banks went from lending at 5.5% to lending at 4% in exchange for 3% additional capital (put in by CC).

would your bank let you reduce your mortgage rate by 1.5% if you paid off an additional 3% of the loan?

they were dumb, myopic and driven by the current year bonus. as always.

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the banks were dumb. look at what the banks have done in your example.

1. earn small fee (0.5%) for writing the mortgages (before being sold into fannie/freddie and then repackaged as AAA) - this covers admin costs

2. earn 4% on the loans. these loans were effectively 97% LTV (based on 32x leverage).

the banks went from lending at 5.5% to lending at 4% in exchange for 3% additional capital (put in by CC).

would your bank let you reduce your mortgage rate by 1.5% if you paid off an additional 3% of the loan?

they were dumb, myopic and driven by the current year bonus. as always.

They earned 0.5% on insanely large amounts of money that carried little to no risk to them if they managed to repackage it quick.

Its not that dumb a mode in principal. However the lending criteria was stretched well beyond the limits of what was "good business practice" and thats where it went wrong.

They also double their earnings by charging you a £1000 setup fee for the priviledge of making them money. Who is the dumb smuck there?

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They earned 0.5% on insanely large amounts of money that carried little to no risk to them if they managed to repackage it quick.

Its not that dumb a mode in principal. However the lending criteria was stretched well beyond the limits of what was "good business practice" and thats where it went wrong.

They also double their earnings by charging you a £1000 setup fee for the priviledge of making them money. Who is the dumb smuck there?

youre right. nothing wrong with the 0.5% and upfront fees (good business). but you gotta agree lending against the same assets at 4% when last year you lent at 5.5% was pure madness (even after 3%more equity).

i know 4% was an example i wonder what the actual figures were?

i think the banks were clever when they were securitising - sausage machine mortgages - but to effectively buy them back was dumb. they must been recognising income immediately (ie not interest) on these deals to CC, etc to boost bonuses otherwise why do it?

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Guest Steve Cook
Very very roughly speaking this is how these funds work. Note everything is just fictional figures but it gives you an idea of how this works.

I set up a fund called "Super Duper Wicked Return Investment Fund"

I stick a couple of million in it from my own pocket.

I convince friends in the city that I used to work with to stick millions in as well.

With 50 Million of investment I go talk to largeand small investment funds to invest in this super return fund and manage to secure 300 million in actual investment (real real money)

I then go to a credit line (perhaps a large investment bank, or more commonly several investment banks) and borrow more money based on the fact I have a 300 million deposit. This allows me to borrow 9 times that investment at lets say 4% interest.

Dodgy Banks are Us, lend out mortgages of lets say 3 billion at 5.5% to homeowners. Now obviously they don't have 3 billion to lnd out they need to borrow the money. They package it up into there AAARated Mortgage Backed Security Package.

I take my 3billion in investment capital and buy this AAA Rated Mortgage Backed Securities (Basically imagine NR packaged up all there mortgages from there client base and sold them to me) and these securities are at 5%. So Dodgy banks are us are still creaming a nice 0.5% off the 3 Billion pie, and I am making 1% off my 3billion pie.

Now heres the leverage.

My fund makes 1% net of 3 billion. Doesnt sound like much. But I have only actuall invested 300 Million in this so my actual return is 10% on my initial investment!!!!! Holy cow thats fantastic. In a nutshell this is what has driven the market. Leveraged funding.

Of course there is a down side, but houses only ever go up!

Suddenly a few of the Joe's that borrowed money cant pay the mortgages. So a few defaults. But as the default rate on the mortgages goes up and the value of the assets (housing) that this is all backed by goes down the whole leveraged situation works against you.

Essentially this is how it works, in reality its more complex as the securities are rolled up from many tranches of mortgages, some low risk some high risk and this is where it all went wrong.

Excellent explanation...Thank you

Steve

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the share price of some high street banks has fallen nearly 50% from peak. I have seen evidence somewhere of bank stocks usually leading the markets down (50% falls in the FTSE expected?). I cant remember where i saw this though - can anyone else or have i dreamt it.

I don't think you dreamed... I don't conclude that the fall in bank share prices will be proportionally similar to the fall in other shares, but I do believe that when confidence is lost in banking, confidence is lost in the entire economy.

I don't have references, but I am sure I've read this somewhere credible... a long time ago... no idea where.

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I don't think you dreamed... I don't conclude that the fall in bank share prices will be proportionally similar to the fall in other shares, but I do believe that when confidence is lost in banking, confidence is lost in the entire economy.

I don't have references, but I am sure I've read this somewhere credible... a long time ago... no idea where.

Surely it's only the oil and mining companies holding the FTSE100 up isn't it? (with some exceptions, obviously)

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  • 298 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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