Carlyle Capital leveraged 32x on mortgages — defaulted on $16.6B in debt

Carlyle Capital Corporation was a Guernsey-based publicly traded mortgage REIT established in August 2006 as an affiliate of The Carlyle Group, one of the world's largest private equity firms. Its business model was simple: borrow short-term money at low rates and invest it in US residential mortgage-backed securities, earning the spread. The leverage was extreme — up to 32 times equity — and the funding came from 13 institutional lenders including banks and broker-dealers.

When the subprime mortgage crisis triggered a global credit freeze in early 2008, the lenders began demanding more collateral or calling their loans. Carlyle Capital could not meet the margin calls. On March 12, 2008, it defaulted on approximately $16.6 billion of debt. Shareholders voted unanimously to file for compulsory winding up under Guernsey law. Creditors seized the remaining assets. The parent company, Carlyle Group, suffered minimal direct financial loss — the structure had insulated it — but the reputational damage was significant.

The collapse came just days before the Federal Reserve's emergency intervention on March 11, 2008, which allowed primary dealers to swap mortgage-backed securities for government-backed collateral. The Fed's action ironically may have accelerated the collapse by giving lenders a way to dump the risky assets. Carlyle Capital was one of the first major casualties of the 2008 financial crisis, falling before Bear Stearns and Lehman Brothers.