From the London Times online:
Global stock markets may have cheered the US Federal Reserve yesterday, but on Wall Street the Fed's unprecedented move to pump $280 billion (£140 billion) into global markets was seen as a sure sign that at least one financial institution was struggling to survive.
The name on most people's lips was Bear Stearns. Although the Fed billed the co-ordinated rescue as a way of improving liquidity across financial markets, economists and analysts said that the decision appeared to be driven by an urgent need to stave off the collapse of an American bank.
"The only reason the Fed would do this is if they knew one or more of their primary dealers actually wasn't flush with cash and needed funds in a hurry," Simon Maughan, an analyst with MF Global in London, said.
There are several reasons for this.
First, Bear Stearns announcement last summer of a $6 billion dollar hedge fund loss started the whole writedown process. In addition, the market for mortgage backed debt is extremely illiquid right now. This is one of the reasons why the Fed has announced it will take these as collateral in the auction facility announced on Tuesday.
But there are still deeper problems. Because banks are taking hits to their capital they are issuing margin calls. This is endangering several hedge funds:
Several hedge funds with assets of more than $4 billion (£2 billion) were on the brink of collapse last night or had halted withdrawals, despite moves by the US Federal Reserve this week to ease America’s deteriorating credit crisis with a $200 billion collateral lending facility.
The potential closure of six funds came as a leading private equity executive, who declined to be named, said that such funds were "snapping like twigs", with one failing every day.
Yesterday Patti Cook, Freddie Mac’s chief business officer, predicted that the Federal Reserve’s $200 billion bond lending facility this week would fail to solve the long-term problem of Wall Street’s deepening credit crisis.
The funds’ predicament – seven funds have been frozen this month – was seen as evidence that the initiative by America’s central bank to allow lenders to swap their risky mortgage-backed bonds for safer Treasury debt, will be of help only in the short term. Those fears hit the dollar and New York equity markets, with the greenback falling to a new low against the euro and sterling, as the European currency hit $1.55 for the first time.
And we have at least one confirmed hedge fund failure now:
The credit crisis has claimed another victim.
Carlyle Capital Corp. said late Wednesday it expects its lenders will seize its assets, causing the likely liquidation of the fund, which until recently owned $21.7 billion in mortgage securities.
"Although it has been working diligently with its lenders, the Company has not been able to reach a mutually beneficial agreement to stabilize its financing," the fund said in a statement. (Read the full text of the statement.)
The fund's likely collapse would be a major black eye for Carlyle Group, the powerful Washington-based private-equity firm whose executives own 15% of the fund.
Though it's registered in Guernsey, U.K., and trades in Amsterdam, Carlyle Group runs Carlyle Capital out of its New York offices. Early Thursday in Amsterdam, the shares plunged 70% to $0.83 each. The stock has lost around 83% since the company first disclosed its funding problems last week.
Simply put, folks, things are getting incredibly nasty. And there isn't much of a respite in sight.