Last Thursday it was Guernsey-based Carlyle Capital
Corporation’s turn to go belly-up. Carlyle Capital is a spin-off from the
Carlyle Group that has George Bush and John Major on its board and has done
very well out of the Iraq war. It is a private equity finance company. (See Private equity finance – a new capitalist mutation.) These are privately
owned firms that borrow other people’s money usually in order to take over other
firms and loot their assets. Under capitalism firms do eat each other. Now it
can be argued that, without jackals, the veld would be full of wildebeests that
had died. Jackals keep the place tidy. But, unless you’re New Labour, you
wouldn’t really praise jackals as wealth creators.
In Britain private equity finance has been driven by a
favourable tax regime. SVG’s Nicholas Ferguson is a millionaire thanks to
private equity finance. He’s a rare example of a capitalist with a conscience.
He finds it odd that he “pays less tax than his cleaning lady.” It is not just
odd – it’s wrong
As we argued a year
ago, private equity finance is a typical product of the overheating stage at
the end of a boom. It’s part of a financial bubble. And bubbles burst.
Carlyle Capital had assets of $700m. It managed to borrow
$21bn, thirty times what its assets were worth. Its main line of business was buying
mortgage securities, bits of paper whose assets were based on people’s
mortgages. That was fine as long as house prices were going up. The bits of
paper would be worth more and more. So Carlyle Capital depended for its
existence on the house price bubble.
Carlyle was worth $700m last week. Now it’s worth nothing,
zilch. Now you see it, now you don’t. That’s what happens when bubbles burst.
On Friday it was Bear Stearns’ turn. ‘Bad news Bear’s’
demise was a bigger hit to the global financial system than Carlyle Corporation.
It was the fifth largest bank in the USA. Last week it was worth $140bn, five
times as much as Carlyle Capital. This week it has been swallowed up by JP
Morgan Chase, pressured to do so by the Fed. Now the Bear’s not worth anything.
With $11.8bn of capital, Bear succeeded in clocking up $395bn in loans –
greater ‘leverage’ than Carlyle had managed. It was phantom money.
Bear’s specialty was lending to hedge funds. They dealt in
obscure financial instruments called Credit Default Swaps. It sounds
complicated, but basically hedge funds bet. They bet on what currencies will be
doing tomorrow or next year. They bet on what commodities will be playing at.
And sometimes they lose. They lost, and Bear Stearns lost too.
Speculator Joe Lewis bought a $860m piece of the Bear when
shares were trading at more than $100. Financial commentators kindly described
his acquisition as ‘counter-intuitive.’ Bonkers is more like it. He’s lost the
lot.
Ten thousand jobs are to go in the City. It seems the
‘wealth creators’ can only create wealth in a rising market when paper wealth
is blooming all round through ‘leverage’. What we’re witnessing now is called
‘deleveraging’, and very painful it is too. Financiers are suffering withdrawal
symptoms from taking leave of cloud cuckoo land. Money has been borrowed on the
basis that payouts will keep going up for ever, and the consciousness has now
dawned that they won’t.
Hold on to your hats. The American Central Bank, the Fed, is
due to meet this week to talk about interest rates. It’s odds on they’ll cut
again. The trouble is, the more they slash rates the more people can smell the
fear.
Robert Peston, economics
commentator for the BBC, comments, “As for central banks, they increasingly
look not like supermen but seven-stone weaklings.
They’ve been reducing
official interest rates, but that’s done little to cut the cost of credit for
most of us or increase its availability, because banks have taken the
opportunity to rebuild their profit margins.
And what about central
banks’ new willingness to allow banks to swap financial assets of dubious value
for hard cash or liquid government bonds?
Well that may have
encouraged lenders to seize dodgy assets from borrowers that are in trouble in
order to dump them on a central bank like the New York Fed.
In other words, central
banks may inadvertently be accelerating that fateful deleveraging process.”
As of Monday March 17th
stock markets are in shock. Later this week the big US banks are set to write
down another $3bn in assets – assets that are no longer assets.
Two million households in the USA face
repossession of their homes. Repossession is not just heartbreaking for the
families involved. It poisons and pollutes the whole housing market.
And
over here the Financial Services Authority guesstimates that two thirds of the
mortgages taken out over the past two and a half years (with sums like six
times household income on offer) are horribly exposed. Capitalist crisis –
coming to your local area soon!
