Blown away without mercy

Common sense says a hedge fund that raised the humble sum of $700m (£345m) and then proceeded to borrow the colossal sum of $21bn to invest in US mortgage-backed securities was asking for trouble. Even so, the collapse of Carlyle Capital Corporation (CCC) is an extraordinary tale that offers a useful insight into the depth of the financial crisis.

For a start, CCC was spawned by the giant private equity firm Carlyle Group, a member of the political and financial establishment - George Bush Sr and Sir John Major were past advisers. It ought to have been able to call upon a favour or two in a liquidity crisis.

In the event, CCC was blown away without mercy by its bankers, all top-grade investment banks, fellow members of the club, as it were. When CCC couldn't put up more capital to support its losing position, the banks seized their collateral. An orderly financial restructuring became impossible. Instead, there was a disorderly grab for assets. It became a case of each bank for itself.

The timing could not be worse. CCC's downfall came two days after the Federal Reserve announced its latest injection of liquidity. The Fed's plan was designed to help the likes of CCC - holders of AAA-rated mortgage-backed securities. Well, the Fed's action didn't help in this case.

Indeed, the cock-up theory says it actually encouraged the bankers to seize assets so that, courtesy of the Fed, they could turn them into pristine government bonds.

Either way, the story shows how hard it is for the Fed to instil confidence in prices, even of AAA-rated securities. CCC's annual report, published only three weeks ago, boasts about it being invested solely in mortgages backed by Fannie Mae and Freddie Mac, government-backed agencies.

These should benefit in "a flight to quality", reckoned CCC, quaintly. Instead, the market seems to have decided that no security backed by US mortgages deserves an AAA rating, whatever the rating agencies say.

The most alarming aspect is that CCC is unlikely to be alone. Its bet - buy low-yielding assets and soup up returns via huge leverage - came from the kindergarten school of finance. It has probably been copied widely. Maybe the bankers who seized their collateral decided that saving CCC would simply be a pointless attempt to swim against the tide.

Search for salvation

The worst fears for stock markets were not realised yesterday. Gold touched $1,000 an ounce, oil got to $111 a barrel, the dollar fell sharply and the latest US retail sales figures were appalling. Amid that mess, stock markets somehow thought they saw some good news. The Dow Jones bounced strongly after an initial 200-point fall.

It's hard to know what the glimpse of salvation was meant to be. Surely it wasn't Standard & Poor's declaration that "the end of write-downs is now in sight for large financial institutions". Rating agencies' credibility in this area was exploded several months ago.

In any case, S&P was talking only about sub-prime-related mortgage assets.

Its statement also said that, if the credit environment doesn't improve, there could be write-downs on a "broad range" of other exposures, including leveraged loans, a huge pool of assets.

Or was Hank Paulson meant to have inspired confidence? The US treasury secretary is a man with a plan to avoid a repetition of the credit crisis - very welcome, too - but he also said this: "We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies."

So Paulson is telling US banks to cut their dividends. How can that be anything but bearish for share prices?

Beyond our Ken

Have we heard the last of Sir Ken Morrison? The great man bowed out as chairman of Morrisons yesterday, and did his best to reassure investors that his role as honorary life president won't extend much beyond cutting the ribbon at store openings. "I am prepared for a situation where I will have more time to look around and I intend to develop new interests in a number of fields," he said.

He and his family still own 15% of the shares, so he would be entitled, as an investor, to grill the executives on a regular basis. After 55 years in the business, and having confounded those who thought the takeover of Safeway would ruin his reputation, Sir Ken might fairly feel his views would be welcome from time to time. We shall see. Sir Christopher Gent was obliged to give up his life presidency at Vodafone even though he maintained until the end that he hadn't [e-mail]