As usual Cramer is worried about the credit markets, in this case Carlyle Capital: “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.” Here’s a little more of that story. WSJ:

Carlyle Capital Corp., a listed investment company managed by a unit of private-equity firm the Carlyle Group, added to worries about forced liquidations of residential mortgage-backed securities after failing to meet margin calls on its $21.7 billion portfolio…it has received a notice of default from one of the banks that helps finance its portfolio of Freddie Mac and Fannie Mae securities through short-term repurchase agreements, known as repos…It said seven repo counterparties had demanded an additional $37 million Wednesday to keep funding in place

Carlyle Capital…leverages its $670 million equity 32 times to finance a $21.7 billion portfolio of residential mortgage-backed securities issued by U.S. housing agencies Freddie Mac and Fannie Mae. All of the securities are rated Triple-A and are considered to be implicitly guaranteed by the U.S. government.

Once again we appear to be seeing a kind of absurd situation: a steep decline in a trading market for a security that, at maturity, will pay 100% of its obligations, is causing all sorts of mischief among financial institutions. That seems similar to the AIG story of the other day.

We question the wisdom of leveraging assets 32x into declining markets of their values, as Carlyle did, though we understand that this is quite common among such gold-plated assets, and indeed, the credit risk would appear to be minimal. However, markets will fluctuate, as the man said, and accounting procedures currently in place mean that there can be vast differences in the intrinsic value of a security and what you can sell it for on any given day.

Fed Chairman Ben Bernanke ought to be a little more engaged on this issue than he appeared to be in his appearance before Congress the other day. WSJ: “‘I don’t know how to fix it,’ Mr. Bernanke said during testimony Thursday before the U.S. Senate banking committee. ‘I don’t know what to do about it’.” That is not an adequate response, given the apparent magnitude of the problems.

UPDATE

And finally, some more cheery news, via WSJ:

Margin calls at several firms raised fears of widespread liquidations, while analyst downgrades and other developments further dampened whatever hope investors might have harbored that the credit crisis is nearing an end. “You’re starting to see more signs of counterparty risk” among companies that were on the opposite side of one another’s credit trades in recent years, said Jeff Middleswart, president of Behind the Numbers, a Dallas-based research firm. “It raises the possibility that some of these companies could have a fire sale to raise capital” by slashing the prices of securities on their books, which could lead to another round of big write-downs…

Carlyle Capital…failed to meet margin calls on its $21.7 billion portfolio. And Thornburg Mortgage disclosed late Wednesday that it had failed to meet a margin call of about $28 million, triggering a string of cross-defaults. Shares of Thornburg Mortgage plunged nearly 52%. Those developments started a cascade of worry that more companies could be forced to unload their holdings into a troubled market in order to make good on their debts.

“I don’t know how to fix it…I don’t know what to do about it” is most assuredly not an adequate response. Indeed, it appears to have a whiff of Andrew Mellon or Herbert Hoover about it.

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