Economics Update

It’s been a busy day today, largely due to the imminent collapse of Carlyle Capital, the investment bank of the Carlyle group.

Lenders are seizing its assets:

By yesterday the fund had defaulted on $16.6 billion of debt and said it expected to default soon on its remaining debt. The fund’s $21.7 billion in assets were exclusively in AAA mortgage-backed securities issued by Fannie Mae and Freddie Mac, traditionally considered secure and conservative investments, which it was using as collateral against its loans.

They could not meet margin calls, and their share price has fallen 90%. See also here.

Paul Krugman has a very amusing comment, that the “Carlyle Group should have stuck to what it knows. It’s great at the merchant of death thing; at investment banking, not so much“.

It’s not entirely accurate, but still really funny, I used to work for the Carlyle Group, but they sold me to buy Dunkin Donuts. Seriously. They sold United Defense, where I worked 2003-2006, to BAE Systems.

In any case, the collapse of the Carlyle Capital has the market worrying about other possible collapses, with the Times of London reporting that, “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 has also hit US currency with the dollar falling to a 12 year low vs the yen and an all time low vs. the Euro, see here, and here.

The Yen has fallen below ¥100:$1.00, ant the Euro hit a new record of €1.000:1.5625. We are talking big time ugly, and there is still the Yen carry trade, where people borrow low interest Yen and invest the money at higher interest elsewhere, that takes a hit when the Yen strengthened.

The falling dollar also drove the price of oil up to a new record, over $111/bbl, and is part, if not most of the reason that gold broke $1,000.00/oz as a part of the flight from the dollar and concerns about inflation.

There will be more pain.

Speaking of pain, retail sales fell in February by the largest month to month amount in 5 years, 1.1%. The preliminary numbers showing an increase that I reported a week ago were apparently just that, preliminary.

Note that this does not correct for inflation, so it’s even worse.

In it efforts to restructure, Chrysler is completely shutting down for 2 weeks in July, that’s everyone who is getting the vacation, not just the guys on the line for retooling. They are claiming that it will, “boost productivity and efficiency”, but my guess is that a lot of folks people will have their vacations extended to forever.

Finally, no monoliner insurer bad news today, or perhaps I missed in in everything else going on, but Countrywide Financial continues to see climbing foreclosures, with the Frbruary rate of 1.64% being more than twice that of a year ago of 0.80%.

I really think that the deal for Bank of America to buy them will fall through, because what looked like a decent deal a few months ago is increasingly looking like a significant overpayment.

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