SeriousBull

Will the Credit Crisis play out with favoritism granted to the well-connected?

Tags: BSC + C + Carlyle Capital + Carlyle Group + investing + JPM + Treasury

Greenspan as head of the Federal Reserve consistently argued that Derivative Securities should not be regulated as they were important tools by which banks could offset risk.  Though the Congress didn’t understand most everything the former Fed Chairman said during his terms at the Federal Reserve, the plain language stuff was goo-gawed at and acted upon

(remember Senator Phil Graham, now McCain’s economic advisor?) such that we had the failure of oversight and credit crisis of today.

Word on the street is that 13 large international investment banks acted on the Greenspan opportunity permitting excessive leverage like Carlyle Capital’s incredulous 30+ multiple of net worth–$675mm in equity and $21.7 billion in mortgage-back holdings. Brokers got in on the action with Bear Stearns, Lehman, Goldman, and Merrill leading the pack acting as Prime Broker to facilitate bets using their lines of credit as a FINRA broker. Now this week, Carlyle Capital, a subsidiary of Carlyle Group the international private equity firm with ties to President George W. Bush and his father George H. Bush headquartered in DC, defaulted on its margin calls triggering a destabilization of the AAA mortgaged-backed security’s market.  Such a dump of MBs hitting the market at one time caused them to fetch only 70 cents on the dollar at liquidation and likely precipitated today’s extraordinary Fed action to bailout Bear Stearns.

One has to wonder, and certainly watch, what happens next to Carlyle Capital–does it receive any favorable forbearance? Bear Stearns had reportedly $1.7 billion of exposure to Carlyle Capital’s debt and Chase, the conduit to Treasury for Bear, $1.4 Billion. Other US banks and brokers held these exposures to Carlyle’s debt: Citibank $4.7 B; Lehman $3B; BOA $2B; UBS $1.8B; ING $1.5B; Merrill $760mm.

That Carlyle Capital, and indirectly the Carlyle Group, might receive “buddy benefit” from the Fed’s decision to extend a life-line to Bear Stearns and US banks who over-extended themselves is an important question with domestic and international ramifications. Carlyle Group’s investors include the government of Abu Dhabai (UAE) 7.5%, and the California Public Employees’ Retirment System 5.5%.  At a time when dollar is at all time lows and the US economy in decline because of fraud, excessive leverage, and a complete failure of regulatory oversight and depends on foreign capital for financial bailout, the apriori question becomes does the US Fed extend special rules to benefit the too big too fail and those with political ties to the Bush Administration? Already SB has questioned the circumstance that US Investment firm Goldman Sachs seems to have been remarkedly unscathed by the housing and mortgage-backed debacle while China increased its MBs holdings 1000 percent during Treasury Secretary Paulson tenure as CEO of the firm. China owns a reported $1.6 trillion US dollars  in US government-backed securities that dollar devaluation, not to ignore the the impact of credit crisis devaluation, would cause ordinary investors to liquidate.

March 14, 2008 - Economy, Politics