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Carlyle Capital's Problem: Mortgage Backed Securities Dropping

Thursday, 13 Mar 2008 | 9:06 AM ET

Futures down 17 points, as Carlyle Capital's mortgage unit is on the verge of bankruptcy; their lenders are forcing the sale of assets to meet margin calls. They are in default of margin calls of over $400 million and are highly leveraged.

The problem is that the value of mortgage-backed securities continues to drop; Carlyle went out of the way to say that one of the problems that prevented negotiation of a workout agreement was that the pricing service the lenders hired to determine the value of the securities kept devaluing the securities, resulting in still more margin calls.

Forcing the sale of an illiquid asset (especially when a firm is so highly leveraged) does not seem very rational, however in the bankers' minds (I am told) they have a fiduciary obligation to seize whatever they can.

The problem here is that this creates the vicious spiral that everyone is afraid of. The lenders may now try to sell assets which are illiquid at the moment, driving down prices even more.

Predictably, the dollar has hit new lows (falling below 100 yen for the first time in 12 years), oil is over $110, and gold is right up against $1,000, and the odds of a 75 bp rate cut by the Fed has now risen to 92 percent. Gold stocks are up.

Retail sales were below expectations.Does this mean you're tired of looking at yourself, Mr. Zimmer? Men's Wearhouse beat their earnings expectations, but their guidance for the current quarter of $0.20-$0.24 is way below expectations of $0.44. "It certainly feels like a recession," says CEO George Zimmer.

They're planning to spend more on marketing to young guys: "You're going to see some hot, young-looking guys in our TV commercials," he said. They had previously used Mr. Zimmer, famous for saying, "You're going to like they way you look."

Men's Wearhouse down 10 percent pre-open.

Countrywide said their mortgage funding totaled $26 billion in February, up 17 percent from January.

Questions? Comments? tradertalk@cnbc.com

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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