The global credit crisis plunged to new depths yesterday as persistent fears over the collapse of a large financial institution caused funding markets to dry up and forced the US Federal Reserve to make available up to $200 billion (£99.3 billion) of emergency financing.

The Fed said that a “rapid deterioration” in the credit markets in recent days had prompted it to begin a series of fresh cash injections in an effort to shore up the balance sheets of America’s stricken banks. Unemployment also shot up in the US last month, adding to the gloom. US stocks tumbled, dragging the Dow Jones industrial average down 138.40 points to 11.902.00. Treasury prices jumped and the dollar fell to record lows.

Bankers said that the moves underscored the deepening severity of the crisis, which was triggered last June by the collapse of the American sub-prime mortgage market and has got progressively worse since. One senior banker in London said: “This is the beginning of the real credit crisis and it’s not going to end without a major casualty.”

Sources said that the present crisis was triggered by cash-strapped banks starting to get tough with their hedge fund clients by making margin calls on loans and drastically raising interest rate payments overnight. The move has pushed the funds into the panic-selling of assets, mostly AAA-rated US mortgage securities, and several are thought to be on the brink of collapse. One of them, Carlyle Capital Corporation (CCC), said yesterday that overnight it had received “substantial additional margin calls” linked to its souring investments in US mortgages.

Thornburg, the US mortgage lender, exacerbated investor jitters when it said that it did not have enough cash to meet $610 million of margin calls. Last week Peloton, a London hedge fund, collapsed after it became unable to meet the banks’ demands.

Bankers said that the problem was related to a perceived increased risk surrounding the AAA-rated prime mortgages and to the consequences of dangerous overleveraging of the funds themselves. In the case of Carlyle, its CCC fund had leveraged its assets by $30 for every $1 of its own cash.

“The whole industry was created by cheap debt,” the banking source said. “It was really all just an illusion.”

Underlining the Fed’s desperate attempts to calm markets, for the first time it said that it would accept mortgage-backed assets as collateral from the banks for fresh loans. As the fear spread, the perceived risk of owning US corporate bonds - measured by the widening of credit spreads – also rose to its highest level.

Friedman, Billings, Ramsey, the US analyst firm, said that the US financial industry would need $1 trillion of permanent capital to maintain current pricing of mortgage assets. However, it added that the industry would not be able to obtain that amount.

Shares of Carlyle’s CCC fund were suspended in Amsterdam yesterday as it disclosed that it had received more default notices from its lenders and that some of those lenders had been forced to sell CCC’s mortgage assets in an effort to recover their loans. The dire forecast came only 24 hours after CCC said that it had been issued with $37 million of margin calls from lenders, having satisfied $60 million of calls only the week before.

Sean Egan, of the Egan-Jones Ratings Company, said: “When financial history is written, the Carlyle liquidation will go down as one of the single most major events. Carlyle has built an image as one of the smartest investors around, and to see one of its funds fall apart shows there is a fundamental problem with the market.”

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