From Davos to Dante in one easy step
9 March 2008Let’s start with this quote from David Rubinstein, head of private equity leaders The Carlyle Group, apparently uttered during the most recent World Economic Forum meeting in Davos: the golden age, the WSJ reports, of private equity was over. It had now entered its “purgatory age. We have to atone for our sins a bit.”
A related story explains how Carlyle Capital, managed by and 15% owned by the Group, is having massive liquidity problems.
Many banks are feeling the pinch these days, paying for a variety of sins: getting used to receiving too many fees per quarter for refinances, for instance, or dipping into the less ethical ponds of fraudulent appraisals or knowingly lending to those who could not afford to pay.
But that is penny thievery, and anyone from the Street knows it. To get a really good picture of how screwed up things can quickly get, you have to leave the world of amateurs and move into the heady world of the professional. After all, it takes a Citibank or a Merrill to blow off $20B in a quarter. It’s just too hard for the rest of us to do.
Which brings me back to the Carlyle Group, which by the way has halted all capital calls and redemptions, and whose trading was also halted last week after the share price dropped from above 20 to 5.
What had they done wrong? Well, with only $670MM in capital, the fund had borrowed enough (32x?) to leverage up, all the way to $21.7B in bonds. According to the WSJ, some observers suggested that this leverage was a bit “on the high side.”
Now, of course, the whole thing has blown up, or is about to.
I only have one question about this kind of investment practice:
Who let these fools anywhere near the palace keys?
As people become familiar with the gigantic screwups common to today’s NY/London/HK scene, they aren’t going to look at their own mortgage pain and feel any kind of kinship with the folks like Carlyle Capital. Rather, they will try to find a tall tree, with plenty of branches.
Dante should have added one new level to describe what this leverage will bring its transgressors.
No wonder the world is nervously waiting for what next shoe might fall. Who knew that the same idiocy practiced daily in DC had leaked up to Wall St.?
One Response to “From Davos to Dante in one easy step”
March 10th, 2008 at 5:28 am
FT alphaville markets live chat today sheds some light on Carlyle Capital:
Can I just blow a whistle?
NH: What for?
PM: Carlyle Capital Corporation.
NH: ???
PM: This was leveraged THIRTY TWO TIMES!!!!!!
PM: Hello? Levered 32 times !?!?!!?!
PM: here’s the fund’s guff
PM: CCC was established on August 29, 2006 with the objective of achieving attractive risk-adjusted returns for shareholders through current income and capital appreciation. CCC invests in a range of fixed income assets including high-grade mortgages and credit products.
PM: Can we just put down a pixelated record here – this fund is/was run by one John C Stomber.
PM: Here’s his biog:
PM: Mr. Stomber is a Managing Director of The Carlyle Group. He came to Carlyle from Cerberus where, as Managing Director, he focused on structured transactions with banking and securities firms. Prior to Cerberus, he was Senior Vice President & Global Treasurer of Merrill Lynch & Company where he worked on the post-1998 turnaround of the firm, serving as a Member of the Executive Management Committee and Chairman of the Asset & Liability Committee. Before Merrill Lynch, Mr. Stomber was a Managing Director at Deutsche Bank from 1991 to 1999. At Deutsche, he held several senior positions including Treasurer of the Americas, where he was responsible for funding and risk management for capital markets and banking activities, and principal representative with federal regulators. He subsequently managed and contributed to the growth of Deutsche Bank’s North American fixed income and foreign exchange swaps and derivatives business. From 1981 to 1991, Mr. Stomber served in various capacities at Security Pacific Bank and prior to that he worked at Crocker National Bank. He earned a BA from Franklin and Marshall College and an MBA from New York University.
PM: Spot that?
NH: Ah, he worked at Crocker National Bank
PM: Yes, this was a scandal in the pre-Applegarth era – pre-dates Northern Rock as a public company.
NH: Yeah, Midland bank bought Crocker in the 80s. it just about crippled the bank, which was subsequently taken over by HSBC.
PM: So that was the original Crock, where this John C Stomber worked.
Readers may also know this former bank as Northern Rock.
NH: Before running Carlyle Unbelieveably Leveraged Capital.
PM: 32 times !?!?!?!?!?!
PM: What did the police say?