What major mistake did Carlyle Capital Corporation make in their 2007 investments?

The major mistake made by Carlyle Capital Corporation in their 2007 investments was the use of high leverage and short-term borrowing. This strategy amplified their risks significantly, as the firm had taken on substantial debt to finance their investments, primarily in mortgage-backed securities. When the market for these securities began to decline, the high levels of leverage meant that losses were also magnified, ultimately leading to a liquidity crisis.

The reliance on short-term borrowing further compounded the issue. As the value of their assets decreased, they found it increasingly difficult to refinance their debts, which were often due in the near term. This situation created a vicious cycle: falling asset prices led to margin calls and forced liquidations, which then further depressed their asset values. Thus, the combination of high leverage and reliance on short-term funding was a critical miscalculation that had dire consequences for the firm.

Investing in stocks, focusing on high-risk investments, or failing to diversify their portfolio are all important aspects of risk management, but the core issue in Carlyle's case hinged on the structural risks introduced by their leveraging strategy.