Bush Family Touched by Subprime Crisis

By F William Engdahl Asia Times Online (Hong Kong)

Carlyle Capital Corp Ltd, a subsidiary of one of the most influential US private equity funds and closely tied to the Bush family, is in default on several of its securities. Carlyle is an offshore subsidiary of the Washington-based Carlyle Group, one of the most politically powerful private equity firms of the past two decades.

Among the leading partners of the Carlyle Group in recent years have been George H W Bush, father of President George W Bush; James Baker III, the Bush family's attorney and fixer; and former British prime minister John Major.

Carlyle Capital reports it is attempting to convince lenders holding US$16 billion in securities not to liquidate the company's remaining collateral. The company is a listed mortgage-bond fund managed by the Carlyle Group. The Carlyle Group already has loaned Carlyle Capital $150 million to cover debt obligations since July 2007. In the past several days it failed to meet margin calls with four banks.

The fear in the market according to informed reports is that its entire portfolio, recently valued at $21 billion, could be sold off in a distress sale, putting major downward pressure on all mortgage bonds globally. A collapse at Carlyle would hit the value of all fixed-income securities, which have already dropped sharply as banks pull back on their lending, and force a new global round of asset sales.

And the Blackstone Group too?
Carlyle is by no means the only elite US private capital group in serious trouble. Blackstone Group, manager of the world's largest buyout fund, said fourth-quarter profit plunged 89% after a "meltdown" in the credit markets and warned that getting loans for takeovers will be difficult in 2008. Profit declined to $88 million from $808.1 million a year earlier.

Blackstone decided to list the private equity company on the stock market in June 2007 in a move some date as the last gasp of the huge securitization and private equity buyout mania of the past decade. Since June its stock has fallen 53%. More serious, it hasn't completed a takeover of more than $2 billion in five months and is struggling to close the $6.6 billion buyout of Dallas-based Alliance Data Systems Corp, a credit-card processor, announced in May 2007.

Crisis spreads to US municipal debt market
The ongoing financial market crisis was nominally triggered by a crisis of confidence in the value of the most risky securities, subprime home mortgages in the US, mortgages often made by banks without checking the borrowers credit history or income. Because the securitization revolution was premised on the flawed illusion that by spreading risk throughout the global financial system, risk would disappear, once the weakest part began to collapse, confidence in the multi-trillion entire edifice of securitized debt began to collapse.

The process unravels over time, which is why most have the illusion of a localized crisis. In reality, centered in the US economic and financial sector, what is now underway is a crisis not even comparable to the 1930s Great Depression.

Now the normally high-quality debt of US local and state governments, so-called municipal debt, is getting hit. California, New York City and the owner of the World Trade Center site will replace their floating rate debt, sharply raising costs for local governments as the economic depression is slashing their tax revenues.

Bond fund managers in New York and London tell us they have never seen such troubles in the municipal bond market before.

The market for floating rate or auction-rate municipal bonds in the US, once thought safe, entered crisis as losses tied to subprime mortgage bonds and related securities threatened so-called monoline bond insurers' AAA ratings, causing investors to avoid the bonds they had insured.

The same monoline insurers, specialized New York financial security insurance companies, had insured subprime mortgage securities and municipal debt. The monoline companies guarantee about half the $2.6 trillion of outstanding state and local government debt, some $1.2 trillion. Higher interest rate costs for states and local governments will aggravate local US fiscal crises as the depression spreads, creating a self-reinforcing downward spiral. The process is in its early stages yet.