Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [84]
I was against the Fed’s actions. It was like watching a trailer for the Fed’s version of a financial horror movie: 28 Days Later—four weeks after the Fed debases the dollar by exchanging treasuries for trash, the raging virus of inflation infects the planet.
The Carlyle Group was off the hook; only investors in Carlyle Capital’s fund would lose money. On March 13, 2008, Carlyle Capital announced the fund’s collapse. It had failed to find financing and it had failed to negotiate the standstill agreement it sought. On March 13, 2008, Carlyle Capital announced it defaulted on about $16.6 billion in loans.27 The Fed had conveniently provided Carlyle’s creditors with a source of liquidity. Now Carlyle Capital’s assets need never come under public scrutiny. Carlyle Capital said its assets were mostly agency AAA mortgage-backed paper, but the agencies had owned up to having AAA rated subprime-backed RMBS tranches, so what exactly backed Carlyle’s investments? Carlyle Capital’s $940 million fund went under and its creditors took approximately $22.7 billion in assets back on their balance sheets. Now they had to fund them (with a little help from the Fed).28293031 Some said the Carlyle Group took a hit to its reputation, but others disagree. One banker told me: “This shows how much clout the Carlyle Group really has.”
As for the investors that lost money in the Carlyle Capital fund, David Rubenstein made a cryptic remark: “We will try to make this experience ultimately feel better than it does today.”32 I do not recall ever before hearing a fund manager say anything like that to investors that lost money in a fund. Don’t worry, we’ll make it up to you; we’re connected, so you’re connected.
Carlyle’s creditors included Bear Stearns, Merrill Lynch & Co., Deutsche Bank AG, and Citigroup, Inc.33 Bear Stearns could not yet access the Fed’s largesse, since the proposed borrowing plan for primary dealers was not yet in effect. One might be tempted to blame market rumors for Bear Stearns’s demise, but there were plenty of troublesome facts to infer that anyone with exposure to Bear Stearns should consider reducing that exposure.
Benjamin Graham had warned of new conditions causing a nervous market to stampede, and creditors could infer they had reason to be nervous.
Neither Moody’s affirmation that Bear Stearns’ rating was stable, nor the press release issued by Bear Stearns convinced the market that Bear Stearns had enough liquidity. The morning of March 11, Bear Stearns’ CFO Sam Molinaro appeared on CNBC to flatly deny that Bear was having liquidity problems. Bear had used up its good will, an important source of Wall Street liquidity in a crisis. Carlyle had not yet announced its March 13 collapse but market watchers wondered: How much exposure did Bear Stearns have to Carlyle Capital? What about the money-losing credit derivatives (long exposure to subprime CDOs) trades that Paulson mentioned the previous year? What about the assets Bear Stearns took back on balance sheet from the two hedge funds in the summer of 2007—how were they doing? One could infer from publicly available information that these were reasonable questions, but Bear Stearns again created its own PR disaster by failing to anticipate these concerns.
Rumors circulated that highly leveraged Lehman Brothers was also having liquidity problems. Lehman informally denied it, and unlike Bear, Lehman still had many market supporters (Lehman would not declare bankruptcy until six months later).
On March 11, SEC Chairman Cox said he was comfortable that Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley had enough capital. Based on what, exactly?