As creditors start liquidating the assets of Carlyle Capital, the Dutch affiliate of US-based private equity firm Carlyle Group,  it is clear the continuing global financial crisis claimed another well-known victim yesterday.

Carlyle Capital had defaulted on about $16.6 billion of debt and said its lenders could take possession of its remaining assets.(See: Carlyle Capital in default, faces liquidation)

So far, about $5.7 billion of the defaulted debt has been sold, the Carlyle Group said Thursday. The downfall of this feted name in financial circles had a domino effect worldwide as equity markets wiped out almost all the gains of two days earlier caused by the liquidity infusion by the Federal Reserve and other central banks.

Carlyle Capital had said that its talks with lenders had broken down after a drop in the value of its mortgage investments, which it said would result in margin calls of up to $500 million, including fresh demands of up to $97.5 million.

Shares of Carlyle Capital fell by more than 70 per cent on Thursday after the management declared on Wednesday evening its inability to reach an agreement with its lenders, and the possibility that the company's assets would be repossessed. This led considerable gap-down openings in Asian and European bourses on Thursday morning with US markets following suit. The negative sentiment is expected to persist for some days, led by shares of banks, mortgage and insurance firms.

Carlyle Capital is an Amsterdam-listed affiliate of the Carlyle Group, the private equity fund, and had been established in 2006 to make investments in US mortgage-backed securities. This was done with stated aim of diversifying from the leveraged buyout business in which the Carlyle Group was already a name to reckon with. Accordingly, it invested heavily in triple-A rated mortgage debt issued by Fannie Mae and Freddie Mac, and, like other investment vehicles, leveraged its capital aggressively, borrowing $31 for each dollar of equity.

On paper, it had $21.7 billion of assets on February 2008, but these assets rapidly depreciated with mortgage debt losing value as the sub-prime crisis spread its tentacles to stronger securities. As a result, creditors like Citigroup, Bank of America, Merrill Lynch, etc, became impatient and demanded more collateral to back up their loans. Even a $150 million line of credit from its parent, the Carlyle Group, was not enough to tide over margin calls in excess of $400 million received by it last week.

As of Wednesday, Carlyle Capital had already defaulted on payments for $16.6 billion of debt, and the creditors had started liquidating the company's assets. Last-minute talks on Wednesday to salvage the fund didn't prove fruitful with creditors disagreeing to stop liquidation proceedings, prompting additional margin calls worth $97.5 million.

As soon as the markets opened next day, shares of Carlyle Capital dropped 78.6 per cent, to 94 cents in early-morning trade in the Amsterdam Euronext exchange. They have fallen more than 90 per cent since the company's problems became public last week, after having debuted at $19 in July last year and traded at $12 even as late as last week.

Although the fund had announced the possibility of repossession last week itself, hopes persisted in the form of a bailout by the parent Carlyle Group or a new deal being negotiated with creditors. However, Wednesday's announcement poured water on all such speculation, and the company expects its creditors to ''promptly take possession of substantially all of the company's remaining assets''.

Carlyle Capital's creditors are a dozen Wall Street firms including Citigroup, Bank of America and Deutsche Bank AG, according to the fund's annual report. The banks use repurchase agreements to lend money and require securities be put up as collateral. As the perceived creditworthiness of asset-backed bonds decline, the amount of money that can be borrowed using them as collateral also falls.

As per law, the creditor has the right to ask for more collateral, as margins calls, to secure the loan. If the borrower does not meet the margin call, the lender may sell the security. As the banks themselves rack up huge losses due to the ongoing crisis, they have been calling in unpaid loans left, right and centre, and have become quite strict regarding repayment schedules on existing ones.

Carlyle's troubles have led many to believe that this is only the tip of the iceberg as far as defaults relating to mortgage-based securities are concerned. Some are of the opinion that this will lead to more banks calling in their unpaid loans by liquidating collateral, resulting in billions of such securities flooding the market and reducing their values further.

Although the Carlyle Group's reputation has been hit by the failure of its first publicly listed fund, many analysts find sufficient reason behind its decision to cut its losses and leave Carlyle Capital to its own devices, citing money spent on bailing it out would be ''throwing good money after bad''.

That Carlyle's problems are not isolated is amply proven by rearguard action taken by several funds in recent weeks. On Wednesday, Drake Management, based in New York, said it might shut its largest hedge fund, while investors in a fund managed by Amsterdam-based GO Capital Asset Management were prohibited from withdrawing funds. Peloton Partners, a hedge fund based in London and run by former Goldman Sachs partners, was forced to liquidate its largest funds last month after it failed to reach an agreement with some of its lenders on the levels of collateral. Thornburg Mortgage, a big United States lender, also ran into trouble after it failed to meet some margin calls.