A publicly traded unit of the high profile US buyout firm, the Carlyle Group said on Thursday that lenders were seizing its assets, sending the fund, Carlyle Capital, into insolvency. The Carlyle Group has close associations with the Bush family.

By yesterday the fund had defaulted on $16.6 billion of debt and said it expected to default soon on its remaining debt. The fund's $21.7 billion in assets were exclusively in AAA mortgage-backed securities issued by Federal mortgage guarantee firms Fannie Mae and Freddie Mac, traditionally viewed as secure and conservative investments, which it was using as collateral against its loans.

Carlyle Capital, which is based in Guernsey, in the Channel Islands and listed on the Euronext stock exchange in Amsterdam, on Wednesday announced that, although it has been working diligently with its lenders, the Company has not been able to reach a mutually beneficial agreement to stabilize its financing. The company expects that its lenders will promptly take possession of substantially all of the Company’s remaining assets.

Carlyle said that the only assets held in the company’s portfolio as of Wednesday, were US government agency AAA-rated residential mortgage-backed securities (RMBS). During the last seven business days, the Company received margin calls - repayment requests or demands for more collateral - in excess of $400 million.

"As the Company was unable to pay these margin calls, its lenders proceeded to foreclose on the RMBS collateral. In total, through March 12, the Company has defaulted on approximately $16.6 billion of its indebtedness. The remaining indebtedness is expected soon to go into default," Carlyle said in a statement. "The Company explored a variety of proposals with its lenders in an attempt to refinance its portfolio on sustainable terms. The Carlyle Group participated actively in those negotiations and was prepared to provide substantial additional capital if a successful refinancing could be achieved. Negotiations deteriorated late on March 12 when, among other things, the pricing service utilized by certain lenders reported a drop in the value of the RMBS collateral that is expected to result in additional margin calls tomorrow of approximately $97.5 million."

Carlyle added that overall, it has become apparent to the Company that the basis on which lenders are willing to provide financing against the company’s collateral has changed so substantially that a successful refinancing is not possible.

The lenders, headed by Deutsche Bank and J.P. Morgan Chase, began selling the securities last night, according to a report in the Wall Street Journal.

The fund was set up in August 2006 with roughly $670 million in cash from Carlyle's owners and other investors, and about $300 million in additional capital raised from a public stock sale.

The capital allowed the fund to go to banks and borrow far more, leveraging its cash investment some 20 times into the portfolio.

Carlyle Capital stock closed at $2.80 in Amsterdam yesterday before the announcement, off 89% from its peak.

The Wall Street Journal says the fund's collapse shows how Wall Street's biggest players have begun playing hardball with some of their best clients. And they reveal how jittery banks have become about their own loan exposures. In the case of Carlyle, 12 banks had lent the fund about $21 billion, or $20 for every dollar of initial capital.

It also illustrates how the credit crunch has moved far beyond subprime mortgages. Carlyle Capital's portfolio consisted exclusively of AAA-rated mortgage backed securities issued by Fannie Mae and Freddie Mac. They are considered to have the implied guarantee of the U.S. government and pay par at maturity.