- The Washington Times - Friday, March 14, 2008

From combined dispatches

A mortgage-backed investment fund created by D.C.-based Carlyle Group faltered near collapse yesterday, in what analysts saw as a sign that more bad investments must be cleared out before markets can begin righting themselves.

Shares of Carlyle Capital Corp. plummeted nearly 90 percent and rattled stock markets around the globe after the fund said late Wednesday that it expected creditors to seize all of its remaining assets — investment-grade mortgage-backed securities — because negotiations to prevent liquidation had failed.

“Someone somewhere has got to fail and this is it,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group LLC. “I think there comes a point when you need to see some of this stuff get flushed out. The bad news just keeps getting deeper every day.”

David Rubenstein, co-founder of the world’s second-largest private equity firm, said Carlyle was caught off guard by the failure of the bank negotiations.

“We were surprised,” he said. “The banks have a lot of their own credit problems. They didn’t have any flexibility.”

An S&P; report gave investors hope that financial companies are nearing the end of the massive asset write-downs that have been unsettling markets since last summer. “The end of write-downs is now in sight for large financial institutions,” it said.

That helped Carlyle Capital shares, which had traded as low as 15 cents, regain some ground to end the day at 35 cents, down 87.5 percent. The shares, which went public at $19 a share in July on the Euronext exchange, traded at $12 just last week.

Carlyle Group, one of the world’s biggest private-equity firms, said that it had taken “extraordinary measures” and worked “exhaustively” to get financing for Carlyle Capita.

The fund’s losses were caused by “excessive leverage,” said Arthur Levitt, a senior Carlyle adviser and former chairman of the Securities and Exchange Commission. “This did not affect the overall Carlyle enterprise,” he said.

“This was a single fund, and I suspect as this plays out, you are going to see a lot of other private-equity companies, a lot of banks, going down the same road,” Mr. Levitt told Bloomberg News.

Carlyle Capital said it defaulted on about $16.6 billion of its debt as of Wednesday, and the rest is expected to go into default soon.

The fund shook financial markets last week after it was unable to offer more collateral to protect its $21.7 billion portfolio of bonds backed by residential mortgages. The banks that had loaned money demanded more collateral, known as a margin call, to cover the gap between the previous value of the securities and their current, lower level.

Carlyle’s troubles amplified fears that billions more dollars in depressed mortgage-backed securities will flood the market, driving their value even lower.

The sell-off of Carlyle Capital’s assets would be a huge setback for the Carlyle Group. Carlyle Capital, registered in Britain but managed by New York-based executives, was the first of its 55 funds to go public and the first of the group’s funds to lose money.

Carlyle Group said the defaults would not affect its other investments.

Carlyle Group is well known for the dozens of world political figures and luminaries it has employed, including former President George H.W. Bush and his secretary of state, James A. Baker III. Carlyle’s current chairman is Lou Gerstner, former chairman and chief executive officer of IBM Corp.

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