Margin Selling Chain Reaction

Troubles at Lehman, Bear Stearns, Carlyle Capital, and numerous other places continue to mount in a chain reaction fashion. Selling begets selling. Let's take a look.

On February 26 in Citigroup VIEs Raise Question Of Solvency I noted that Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. may find they haven't dodged the credit crisis.

Earlier today in Bankruptcy Fears In Bear Stearns Options I noted that Lehman Brothers' balance sheet was levered 40 to 1.

Now I see Lehman cutting 5 percent of its work force.

Lehman Brothers Holdings Inc (LEH), the Wall Street investment bank, is laying off 5 percent of its work force, or about 1,430 people, because of difficult market conditions, a person briefed on the matter said on Monday.

The cuts are being made across all divisions and regions, and employees affected are being notified on Monday, the person said.

Lehman employed about 28,600 people as of November 30, 2007, according to the company's most recent annual report.

The bank declined to comment.

Lehman Scared Half To Death

The reason Lehman declined to comment is they are scared half to death. Lehman is leveraged to the hilt in much of the same garbage that is sinking Carlyle Capital.

I commented on Carlyle Capital a few days ago in Carlyle Capital Hit With Margin Calls And Default Notice.

It would not surprise me in the least to see Carlyle go completely under. If anything, hedge funds leveraged 32:1 as Carlyle was, deserves to be obliterated.

Carlyle Capital Could Lose Billions

Earlier today a report suggested Carlyle Capital Could Lose Billions.

Private equity firm the Carlyle Group came under renewed pressure to come to the rescue of its beleaguered investment fund, Carlyle Capital, which warned on Monday that creditors could liquidate up to $16 billion of assets.

The pressure was on after Carlyle Capital announced Monday that creditors of the bank may have liquidated up to $5 billion of assets on the open market. It warned that while it was in negotiation with lenders over backing for $16 billion in securities, it could be forced to liquidate the assets if an agreement is not reached.

Shares in Carlyle Capital have been suspended since Thursday, when it first warned that it was struggling to meet the flood of margin calls--or demands from lenders to provide additional collateral--that have followed an increased aversion to residential mortgage backed securities.

Carlyle Capital, which had borrowed 32 times its capital to fund its investments, like other heavily leveraged funds been particularly vulnerable. Its troubles are similar to those of Peloton Partners, a London-based hedge fund which collapsed last week after creditor banks withdrew their funding, forcing the liquidation of assets.

Carlyle Similar To Peloton Partners

Let's key in on the idea that "Carlyle's troubles are similar to those of Peloton Partners."

I talked about Peloton in Margin Calls Force Selling of Assets, Falling Prices.

Now, how do those problems differ from the wild action described in Bankruptcy Fears In Bear Stearns Options or the massive leverage in Lehman brothers?

I suggest they don't. All of these problems are related. They are related by leverage and similar strategies. And it is only a matter of time before leverage hits commodity funds foolishly chasing the last market in an uptrend.

If you think there are safe places to hide with leverage, you are mistaken. Net long leverage everywhere is going to be wiped out. Furthermore, there will be nothing remotely inflationary about this when it happens. It is simply far beyond the Fed's ability to control or even contain this train wreck.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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