Friday, June 14, 2013

Carlyle's Low Interest, Easy Money Redux

The WSJ asked Carlyle co-founder David Rubenstein to compare now to just before the financial crisis, both times of easy money and low interest rates:

Last time before the crisis arose officially, I think people recognized that we were in a bubble.  It was widely recognized.  People did think that subprime loans were real ready for a cutback.

The Carlyle Group recognized subprime loans were in a bubble?  Was that before or after the collapse of Carlyle Capital Corporation, a $22 billion mortgage backed securities fund?  Low interest rates and easy money fueled CCC, which collapsed due to high leverage.  FT reported:

A November 2006 offer memo described CCC’s plans for “superior risk- adjusted returns from investments in a diversified portfolio of fixed income investments” that “expects to pay investors 90 per cent of its net income, have net returns of 14.1 per cent and a projected net dividend yield of 12.5 per cent” by the fourth quarter of 2007.

The document added that about 86 per cent of the assets would be in triple-A rated mortgage assets. By the second quarter of 2007, CCC planned to have $9.2bn in mortgage assets – of which 94 per cent would be triple-A rated – and less than $1bn in bank loans and other corporate debt, with $19 of borrowed money for every $1 of investors’ money. 

Over the next 16 months, until CCC imploded in March 2008, investors did not receive a single dividend payment.

In today's low interest rate, easy money environment Carlyle's fastest growing businesses are their hedge funds and collateralized loan obligations, pooled debt instruments like subprime mortgages.  Before the financial crisis Carlyle lost BlueWave Partners, a hedge fund, in addition to Carlyle Capital Corporation.

Small investors should study Carlyle's history, because their founders, like U.S. Presidents will rewrite the past to favor them in the present. 

Update 6-18-13:  Fitch predicted China's debt bubble will collapse.