A mortgage-backed investment fund created by the Carlyle Group faltered near collapse Thursday, in what analysts saw as a sign that more bad investments need to be cleared out before markets can begin righting themselves.Shares of Carlyle Capital plummeted nearly 90 percent and rattled stock markets around the globe after the fund said late Wednesday that it expected creditors to seize all of its remaining assets — investment-grade mortgage-backed securities — because negotiations to prevent liquidation had failed. "Someone somewhere has got to fail and this is it," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group LLC. "I think there comes a point when you need to see some of this stuff get flushed out. The bad news just keeps getting deeper every day."



An S&P report gave investors hope that financial companies are nearing the end of the massive asset write-downs that have been unsettling world markets since last summer. "The end of write-downs is now in sight for large financial institutions," it said.

The helped Carlyle Capital shares, which had traded as low as 15 cents, regain some ground to end the day at 35 cents, down 87.5 percent. The shares, which went public at $19 a share in July on the Euronext exchange, traded at $12 just last week.

The Carlyle Group, one the world's biggest private equity groups, said in a statement that it had taken "extraordinary measures" and worked "exhaustively" to get financing for Carlyle Capital, but talks had ended because the terms of the proposed debt had become too expensive.

Asked whether the fund would simply shut down, spokeswoman Emma Thorpe said, "We're evaluating options for the fund." She declined to elaborate.

Carlyle Capital said it has defaulted on about $16.6 billion of its debt as of Wednesday, and the rest is expected to go into default soon. About $5.7 billion of the defaulted debt has been sold, the Carlyle Group said Thursday. Thorpe said she couldn't say what has been done with the rest.

The fund shook financial markets last week after it was unable to offer more collateral to protect its $21.7 billion portfolio of residential-mortgage-backed bonds. The banks that had loaned money demanded more collateral, known as a margin call, to cover the gap between the previous value of the securities and their current, lower level.

Carlyle's troubles amplified fears that billions more dollars in depressed mortgage-backed securities will flood the market, driving their value even lower. The reports helped drive down markets in Europe and Asia, and Dow Jones industrials sank more than 220 points before the S&P report mollified the market. The Dow ended the day 35 points higher.

The sell-off of Carlyle Capital's assets would be a huge setback for the Washington, D.C.-based Carlyle Group. Carlyle Capital, registered in Britain but managed by New York-based executives, was the first of its 55 funds to go public and the first of the group's funds to lose money.

Carlyle Group said the defaults would not affect its other investments.

"We believe it will not have a measurable impact on any of our other funds, investments and portfolio companies," the Carlyle Group said in a statement. It manages $81.1 billion and has invested $43 billion of equity in 774 corporate and real estate transactions that cost a total of $229.3 billion.

More than a year ago, Carlyle Capital leveraged its $670 million equity 32 times to finance a $21.7 billion portfolio of AAA-rated residential mortgage-backed securities issued by Freddie Mac and Fannie Mae. It borrowed money from at least a dozen banks and firms, including Bank of America Corp., Citigroup Inc. and Merrill Lynch & Co.

But the value of mortgage-backed securities has plummeted as U.S. home prices fall and foreclosures surge, prompting the banks to ask Carlyle Capital for more than $400 million in additional capital.

Since the beginning of the credit crunch, Carlyle Group extended loans to Carlyle Capital to help meet margin calls, including a $150 million revolving loan, Citigroup analyst Donald Fandetti told investors in a research note March 6. "It appears CCC is fully drawn on this line and so far no further loans have been provided."

Hopes for refinancing fell apart after lenders said the value of the collateral had fallen further, and negotiations disintegrated late Wednesday as banks asked for even more collateral worth about $97.5 million.

Wilkinson, of Interactive Brokers Group, said it didn't make sense for Carlyle Group to keep bailing out its mortgage-focused fund.

"If it's a standalone entity that's vulnerable to failure, then you let it go and you bear the consequences but you certainly don't throw good money after bad," he said.

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AP Business Writers Joseph Altman and Stephen Bernard contributed to this report.

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