Carlyle's Painful Default

Sure was hoping it wouldn't come to this, but right now we don't even have enough money in the system to buy one asset and sell another and take advantage of the differences.

I know you could argue that who cares, people shouldn't be levering up like that anyway. All people should be able to do is borrow a little bit against their collateral and do nothing else.

But we have trillions of dollars invested in a system where we own one asset and we bet another asset against it, either as an arbitrage or a way to pick up extra interest. A lot of the mortgage REITs that you see going under, and have gone under, were companies that existed to exploit differences in residential mortgage prices. They took on some credit risk, meaning that the assets they bought weren't rock solid but had been as long as housing didn't depreciate too much, but they had good steady businesses.

But those have now been obliterated by the decline in the value of the collateral.

Today with the default of Carlyle Mortgage, we are seeing that even companies that took on no credit risk, companies that make bets on rock solid agency paper, can go under. Agency paper is about as good as it gets below treasurys and has implicit guarantees of the government. If that paper is worthless we are all worthless.

This is all really about the lack of capital to lend to these entities. The system doesn't have it.

That's what Carlyle is about. No one has the money to pay those who borrow on a huge scale to make bets on financial assets.

I will be following this new development all day but it should send shudders through every single institution with a credit line in the country today.

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At the time of publication, Cramer had no positions in stocks mentioned.

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