This was America's Northern Rock moment. Bear Stearns was one of the first banks to admit to losses on sub-prime mortgages last summer and had already sacrificed one chief executive to the credit crunch. But on Friday, just days before it was due to report financial results, it was forced to turn to the Federal Reserve for emergency funding, delivered via its fellow bank JP Morgan.
The two Wall Street giants have offices directly opposite each other, and Morgan's involvement evoked echoes of the Great Crash in 1929, when the bank's headquarters was the venue for the crucial meeting to organise a bailout of tottering financial institutions.
Bear's travails were the final act in a catastrophic week for the world's financial markets, in which every day brought a new, dismal record. The dollar plumbed new depths against the euro and fell below 100 yen for the first time since 1995; the price of gold - traditionally a haven for investors in difficult times - soared through $1,000 an ounce to hit its highest ever level; and several hedge funds stumbled towards insolvency, as banks hit by losses in the sub-prime markets threatened to call in their loans.
From Darling's calm demeanour, it would be easy to imagine all this was a little local difficulty, caused by a shortage of Gordon Brown's favourite virtue, prudence, and that the UK can power on regardless. But by the end of the week, he was discussing the latest alarming developments with his US counterpart, Treasury Secretary Hank Paulson.
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A Carlyle Group fund admits that it can't meet lenders' demands for money and collapses. The price of gold reaches a record, trading at $1,000 an ounce. The dollar falls further against key currencies.
In its first intervention for more than a decade, the Israeli Central Bank buys dollars to prevent further falls, raising the prospect that other central banks may prop up the dollar. US Treasury Secretary Henry 'Hank' Paulson warns that America's largest banks need extra capital on top of the $70bn (£35bn) raised so far to stop the credit crisis worsening and says tighter regulations are needed on lending to homeowners .
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A publicly traded affiliate of the Carlyle Group said yesterday that lenders were seizing its assets, sending the fund, Carlyle Capital, into insolvency.
The collapse of Carlyle Capital is the first time a Carlyle Group fund has failed and is a stinging embarrassment for the District private-equity powerhouse, which has built an international reputation with a client list that reaches around the world.
The high-profile downfall, part of the broad turmoil in credit markets worldwide, followed a week of frantic negotiations between the Carlyle Group and a number of lenders. Carlyle Group's three founders as recently as Monday were considering injecting cash into the fund as a way to usher it through the credit crisis.
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.
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Could the Federal Reserve's efforts to prop up the banking system have the unintended consequence of pushing some debt-burdened hedge funds out of business? The question arose this week after Carlyle Capital—a fund with $22 billion in assets at its peak—announced that creditors were seizing its collateral because it couldn't meet margin calls, or requests for additional collateral.
Carlyle Capital's announcement came just two days after the Federal Reserve's announcement that it would allow 20 big commercial and investment banks to borrow up to $200 billion in Treasury securities in exchange for high-quality collateral. A source close to Carlyle Capital endorsed the idea that the Fed's action might have contributed indirectly to its crash, saying in response to a question from BusinessWeek, "it's possible that the move by the Fed emboldened some lenders."
How could the Fed unintentionally have contributed to Carlyle's unraveling? The theory is that the Fed's action made Carlyle Capital's assets more lucrative to the firm's large creditors. Therefore, those creditors had an incentive to let Carlyle Capital fail and seize its assets. Robert Peston, business editor of the BBC, advanced the idea Mar. 13 on his blog, and the notion was quickly picked up and circulated by other bloggers.
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