No one can complain that they weren’t warned. The implosion of Carlyle Capital Corporation is a spectacular failure, probably the most damaging to sentiment in credit markets since Northern Rock. But this time all those closely involved were consenting adults.

Those who read the prospectus for the company had no doubt about its potentially precarious nature. You lose count of the number of references to “leverage without limit”. Never mind the eye-popping 32 times gearing CCC opted for. There was nothing in the company rules to prevent it leveraging up 320 times.

The “Risk factors” section runs to 24 pages and every horrible stage in CCC’s decline and fall in the past two weeks is eerily foreshadowed in a document written nine months earlier. The securities CCC invested in could fall in value, it said. They did. CCC could be forced to offer up more collateral, it said. It was. The liquidity cushion could be insufficient to meet margin calls. It was.

So shareholders, who will almost certainly be entirely wiped out, have little cause for complaint.

The banks that financed the $22 billion (£10.9 billion) of debt that eventually capsized the company were also fully aware of the risks. Many of them were directly involved in bringing this house of cards to market in the first place.

As the architect, builder, concierge and maintenance man, Carlyle Group was more aware of the way the building had been constructed than anybody else.

Carlyle has been badly shaken by the affair. With its 59 other funds doing all right, it is not used to failure and is seriously worried about the bruising this could inflict on its reputation with investors, hence the talk of some kind of compensation.

The risk of similar casualties in other structured credit vehicles and hedge funds is obviously high. Banks are in no mood to sustain similar businesses if they can get out without loss. One theory yesterday was that the Federal Reserve’s latest move to introduce liquidity into the system this week may actually have made matters worse. The unloved mortgage-backed securities seized from CCC were suitable to be exchanged at the Fed for highly desirable and liquid Treasury bills. If that is the case, it could hasten the end for other defaulting borrowers and encourage banks to pull the plug on those teetering on the edge.

Any glimmer of hope is seized upon in such torrid times, so Standard & Poor’s view that sub-prime losses will level out at $285 billion and that the end is in sight for hard-pressed banks was balm in Gilead for Wall Street last night.

Unfortunately, it is premature to put a final cost on the catastrophe while in the US house prices are falling, job losses are soaring and foreclosures are rocketing. Attempts to draw a line under the crisis look like wishful thinking.

patrick.hosking@thetimes.co.uk

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