Up until the credit crisis, private equity firms had it made. They had plenty of leverage to play with and could load up their acquisition targets with it. So, they could realize a fantastic return on equity, mitigate their own risks, and show that they were the studs of the Street.

Then, all that went away. Credit markets dried up, and private equity companies lost their acquisition fuel. The numbers aren't as big as they used to be, but it looks like the private equity market is back in action.

As layoffs have spread across banking, investment banks and hedge funds, things have been fairly quiet for private equity firms. Then again, these operators tend to have small employee bases.

But, interestingly enough, we may be finally seeing some pink slips for the private equity folks. According to The Wall Street Journal, 3i will announce a 15% cut in its staff and that there will be a 19% cut at American Capital.

And now it looks like the tier-1 firms are not immune. The Carlyle Group is gutting 10% of its staff this week (which comes to about 100 people). There's not much deal-making to do right now. Besides, it looks like it will be tougher for private equity firms to raise new capital. If anything, the focus will be on trying to manage the existing portfolios.

What's more, Carlyle has had a variety of blunders. There was the implosion of its mortgage fund (Carlyle Capital) and the recent bankruptcy of its Hawaiian Telecom holding.

Of course, Carlyle is not alone. So, it's a good bet we'll start seeing more layoffs in the private equity world.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.

Lost in the flurry of activity over the weekend surrounding The Bear Stearns Companies (NYSE: BSC) is this morning's news that Carlyle Capital, the subsidiary of the Washington-based private equity king Carlyle Group, is 'winding up.' MarketWatch reports that Carlyle Capital, 15% of which is owned by Carlyle Group partners, has more liabilities than assets.

It is interesting that Carlyle can't utter the word 'bankrupt' -- instead preferring the innocuous-sounding term: 'winding up.' But Carlyle shareholders will be left with nothing. And, as I posted, since Carlyle borrowed $32 for every dollar of equity, or $16.6 billion, to buy mortgage-backed securities (MBS), the banks who take possession of those MBSs will probably be eager to dump them as fast as possible -- unless they think they will get a better deal by waiting.

But why wait? After all, the Fed lent $30 billion to JPMorgan Chase & Co. (NYSE: JPM) on a non-recourse basis to take over Bear Stearns's MBSs. This means that if Bear's MBSs go bad, the Fed will take the hit. Is there any active market at all right now for MBSs? If so, should the Fed just dump Bear's MBSs and take the hit now? Won't Carlyle Capital's banks do the same? And who will step in to buy all these MBSs? At what price?

Where does this all end?

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Samuel Johnson once opined: "Depend upon it, sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully."

This seems to be the feeling with the private equity folks at the Carlyle Group. Basically, they operate a troubled affiliate, Carlyle Capital. Unfortunately, the fund is chock-full of mortgage securities -- and, as a result, there are a variety of margin calls. Perhaps as much as $16 billion could be liquidated (in a market that doesn't want to make bids on any kind of mortgage paper).

So far, Carlyle's exposure is fairly light, with about $670 in capitalization (which includes Carlyle funds, associated investors and public shareholders). And confidence is at dire lows. After all, the shares of Carlyle Capital have been suspended (the fund is listed in Amsterdam).

The Wall Street Journal [subscription required] reports that banks lent a mind-boggling $32 for every dollar of equity in Carlyle Capital, the credit defaulting mortgage investment joint venture between Carlyle Group and Thornburg Mortgage (NYSE: TMA). This demonstrates that while leverage can magnify returns in an up-market, it can also magnify losses in a down one.

The cause for both bankruptcies was that banks made a margin call -- a request for some of their loan to be repaid immediately -- and neither party was willing to cough it up. In the case of Thornburg's $28 million cash call, it is a bit less surprising that it could not come up with the money. But Carlyle Capital's parent is an $80 billion private equity firm -- so it's interesting that it chose not to fork over the $37 million the banks wanted.

What's going on here is that our capital markets depend on the health of Wall Street banks. The banks are running out of capital because the value of their assets -- particularly asset-backed securities (ABSs) such as Collateralized Debt Obligations (CDOs) -- are plummeting. As those assets drop in value, banks need to write down those values and raise capital to maintain their capital ratios -- for example, Citigroup's (NYSE: C) target ratio of capital to assets -- its so-called Tier One Capital Ratio -- is 7.5%.

MAJOR PAPERS:

• As chairman and CEO of Countrywide Financial Corporation (NYSE: CFC), Angelo Mozilo refused to take pay cuts, according to a report by a House committee, and reported by the Wall Street Journal. The focus of a meeting today with the House Committee on Oversight and Government Reform on executive compensation at companies involved in the subprime fiasco will be on Mozilo, who was paid about $250M between 1998 and 2007, plus $406M from his sale of Countrywide shares.
• The Wall Street Journal also reported that Corning Incorporated (NYSE: GLW) is looking to sell crystal business Steuben Glass, a unit that has lost $30M over the last five years. If Corning cannot find a buyer for the unit, executives said they will consider other options, including closing Steuben.

• After failing to meet repayment requests, the UK Times reported that Carlyle Capital Corp Limited (OTC: CARYF), the Dutch-listed affiliate of U.S. private-equity firm Carlyle Group, held emergency restructuring talks with its banks Thursday evening. CCC disclosed that it had received one default notice after receiving margin calls for over $37M from banks since Wednesday but was "unable to meet the demands" of several. The firm expects "at least one" more default notice.

• Despite shedding several units, Vikram Pandit, Citigroup Incorporated's (NYSE: C) CEO, denied rumors that the bank could put its unit in South Korea up for sale. According to sources, Pandit, currently reviewing operations in an effort to boost earnings and cut costs, said "absolutely no" when directly asked about a divestiture, Reuters reported.

MAJOR PAPERS:

• A contract awarded to American Superconductor Corporation (NASDAQ: AMSC) by the Department of Homeland Security wasn't put out for bid as is usually required, and is being investigated by the House's Committee on Energy and Commerce, as well as the Subcommittee on Oversight and Investigations, reported the Wall Street Journal (subscription required).
  
• The Wall Street Journal reported that private equity firm The Carlyle Group has been forced to lend a second $100M to mortgage fund Carlyle Capital, which has cancelled its dividend and is selling assets to meet margin calls, just two months after listing on the Euronext Amsterdam.
• U.S. consumers are defaulting on credit-card payments at a significantly higher rate than last year, raising the prospect that the problems in subprime mortgages will spread to other types of consumer debt, reported the Financial Times (subscription required).
  
• Barclays plc (NYSE: BCS) set up a $3B structured finance vehicle on behalf of German bank Sachsen less than three months before Sachsen's recent collapse, reported the Financial Times, which added that the finance vehicle set up by Barclays for the German bank had most of its assets invested in securities backed by prime and subprime U.S. mortgages.

• According to regulatory filings, State Street Corporation (NYSE: STT) has the most exposure to asset-backed commercial paper among European and American banks, the U.K. Times reported.