Many people have underestimated the breadth of the credit crisis. Take the Carlyle Group. Before it raised its profile in the private equity world, Carlyle had a shadowy reputation as the private wealth manager for the elite of the world’s military industrial complex. John Major, George Bush the elder, former American-defense Secretary Caspar Weinberger, and a long list of former government officials who’d crossed back into the private sector had money with the Carlyle Group.
This morning we read that a public spin off from the Group, Carlyle Capital Corporation, has US$22.7 billion tied up in mortgage-backed securities. The parent has injected two US$100 million installments into its wayward child.
The naughty Capital Corporation told shareholders it had no subprime exposure. But it did. It said all the exposure was Triple A rated. But it wasn’t. It said liquidity was ample. But it isn’t.
In a letter to shareholders, the Group’s CEO John Stomber said, “We designed CCC’s business model to withstand a liquidity event equal to the events of October 1998, when the demise of Long-Term Capital Management threatened the financial markets. We believe the recent liquidity disruption is significantly worse than the events of 1998.”
It’s another example of models being insufficiently imaginative. Just because it hasn’t happened before doesn’t mean it can’t.
Markets and Money