HEAR THE DOLLAR HOLLER

BIZNETDAILY Fed abandons dollar in new round of rate cutsReacts to fall of investment giant Bear Stearns, Carlyle Capital Corp.
Posted: March 17, 20083:18 pm Eastern
By Jerome R. Corsi© 2008 WorldNetDaily

Wall Street opened Monday nearly 200 points down after a weekend in which Bear Stearns, the 85 year-old securities firm, and Carlyle Capital Corp., an investment fund run by one of the country's largest private equity firms, each went bankrupt..
Over the frantic weekend, the Fed took unprecedented steps to provide almost unlimited lending to prop up anticipated widespread losses in bank asset portfolios.
Yesterday, J.P. Morgan agreed to acquire Bear Stearns for $2 a share, a deal that values Bear Stearns at a mere $236 million, compared to a market capitalization of $3.54 billion only last Friday.

By midafternoon trading, the Dow was in positive territory, bolstered in part by J.P. Morgan, the biggest gainer among the index's 30 component stocks.
Bear Stearns continues to face a crisis in an asset portfolio of mortgage-backed securities that was leveraged as high as 30-1 by borrowing, with the borrowed funds also invested in mortgage-backed securities.

Carlyle Capital Corp. has faced much the same problem as its highly leveraged portfolio of $21.7 billion in mortgage-backed securities also faces enormous losses.
For every $1 in capital the Carlyle Capital Corp. raised from investors, another $30 was borrowed from banks to invest, largely in mortgage-backed securities issued by U.S. housing agencies Freddie Mac and Fannie Mae.

As the mortgage market has dropped in value nationwide, mortgage delinquencies and home foreclosures have increased, causing collateralized mortgage-backed securities to drop dramatically in value.
The highly leveraged portfolios held by Bear Stearns and the Carlyle Capital Corp. went into bankruptcy when neither could sell enough of the good mortgage-backed securities in their asset portfolios to pay off the debt service on the bad mortgage-backed securities.

Bear Stearns and the Carlyle Capital Corp. then defaulted when they each were faced with margin calls they could no longer meet, simply because they lacked sufficient capital to maintain the debt service on outstanding loans.
The Federal Reserve, in order to induce J. P. Morgan to acquire Bear Stearns, guaranteed J. P. Morgan it would compensate for any additional losses Bear Stearns incurs in its highly leveraged mortgage-backed securities asset portfolio.

In Carlyle Capital Corp.'s case, the investors in the fund and the banks lending to the fund have absorbed the losses.
Carlyle Group tarnished
The failure over the weekend of the Carlyle Capital Corp. is the most serious financial misstep by the Carlyle Group since its founding in 1987.

With over $81 billion under management, and 575 investment professionals operating out of 21 countries, the Carlyle Group is one of the nation's largest private equity firms.
In 2006, Carlyle Capital Corp. was created as a separate legal entity by the Carlyle Group.
Before the failure of Carlyle Capital Corp., the Carlyle Group had never had a fund go bankrupt.
Six Carlyle Group partners, including co-founder David Rubinstein, own 15 percent of the Carlyle Capital Corp.

The Carlyle Group, shaped largely by former chairman Frank Carlucci, has enjoyed top connections to the presidencies of Bill Clinton, George H. W. Bush and Ronald Reagan, for whom Carlucci served as secretary of defense.
The Carlyle Group has compensated former President George H.W. Bush and former Secretary of State James Baker III for participating in various Carlyle Group deals.
WND previously reported the Carlyle Group has established a team to invest in Mexico. The team includes Mark McLarty, the president of Kissinger McLarty Associates and former chief of staff and special envoy to the Americas for President Clinton.

Fed in dilemma
In an effort to stabilize the stock market, the Fed also took the extraordinary measure of lowering the discount rate by a quarter point, from 3.5 percent to 3.25 percent.
The discount window is a lending facility the Fed uses to lend money to banks on a short term basis, to meet liquidity needs.

Last night, the Fed announced money would be made available to the 20 large investment banks that serve as the "primary dealers" trading Treasury securities directly with the Fed, with no pre-determined limit on the amount of money a bank might borrow.
The idea is to allow the primary dealers to lend to banks on a short-term basis by holding as collateral hard-to-sell instruments in bank asset portfolios, including mortgage-backed securities that may have little or no true market value.

Banks are allowed to include funds borrowed from the Fed or from other banks as the legal reserve they are required to maintain to continue operating.
WND reported the non-borrowed reserves of U.S. banks has plummeted to a negative $18 billion in February, reflecting an apparently worsening situation from the negative $8.8 billion reported at the end of January.

A new Term Auction Facility opened by the Fed at the discount window resulted in $60 billion borrowing by banks in the two-week period ending Feb. 13.
The Fed's decision to make available to banks an almost unlimited amount of borrowed funds reflects the seriousness with which it views the current crisis in bank assets.
As WND reported in August, the Fed was headed for the dilemma it now faces.
If it lowers the federal fund rate, the dollar will suffer on world currency exchange markets. A dollar sell-off risks triggering a new stock market sell-off.

Yet, if the Fed holds or raises rates to support the dollar, it will almost certainly prompt a massive stock market sell-off.
A Fed policy of providing liquidity to banks is tantamount to a decision to abandon the dollar. The dollar was trading today at $1.57 to the euro, a new all-time low, following a close Friday of 71.67 on the U.S. Dollar Index, the lowest maker ever.

Futures markets are now predicting the Federal Open Markets Committee in its meeting tomorrow will lower the federal funds rate a full 1 percent, with the expectation of a cut as much as 1.25 percent before the end of the month.