Carlyle Deserved to Collapse

Should Carlyle Capital be aggrieved that its lenders are seizing its assets? There is a case to be made – and it’s made quite well by Robert Peston – that this is all the fault of the Fed and its new TSLF facility. Rather than dump Carlyle’s assets, the banks can use them as collateral at the Fed’s new window, and get lovely liquid Treasury bonds in exchange: something Carlyle can’t do itself.

So maybe Carlyle got unlucky, in that it might have been able to negotiate something with its lenders had the TSLF window not been in existence. On the other hand, Carlyle was clearly the architect of its own unluck, as would be any insolvent fund with 32x leverage. No one has any business taking on that kind of leverage in this kind of market, and efficient markets demand that when such outsize bets sour, the bettor collapses.

In any case, Carlyle is now in default on $16.6 billion in obligations: that’s a huge default, even if recovery value is going to be very high indeed. And it’s yet another striking datapoint for whomever is going to write the history of this credit crisis.

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