By Edward Niedermeyer
February 20, 2008
Cerberus Capital Management had to know it was taking on risk when it picked up Chrysler and GMAC at cut-rate prices. After all, Chrysler had tried its level best to drag Daimler down during their brief, unhappy marriage and GMAC is hardly a low-risk proposition given the current credit market dyspepsia. But private equity firms are big and loaded, right? Cerberus will weather the storm, right? Andrew Sorkin of the NY Times' Dealbook blog reckons it might not, and predicts dire consequences for all of private equity-dom. Noting Cerberus' founder Stephen Feinberg's disdain for publicity in the wake of its purchase of the terrible twins, Sorkin figures the fund is in for some more bad press in coming days. He calls the purchases "perhaps the riskiest bets at the peak of the buyout boom," and points to Chrysler's $18b in pension and health care liabilities as a potential cause for a Cerberus meltdown. If such a meltdown were to occur, it would certainly have Sorkin running for his superlatives thesaurus.
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POWERED
February 20th, 2008 at 5:12 pm
With three heads, the problem for Cerberus shouldn’t be chewing. Indigestion is the more likely ailment.
February 20th, 2008 at 5:35 pm
“After all, Chrysler had tried its level best to drag Daimler down during their brief, unhappy marriage…”
This is an attempt at a joke, right?
February 20th, 2008 at 5:45 pm
Cerberus really believed it had scored huge right after the purchase. That euphoria wore off real quick. Now with the credit markets seized up their only shot out of this mess is to sell a lot of vehicles…fast.
February 20th, 2008 at 5:45 pm
I think Cerebus’ grand plan was always to shift their risk off to the banks and whoever else was dumb enough to buy the buyout bond. IN the days of easy credit, this was easy. When the bond sale went bust because no one wanted them after the credit meltdown they were left with doing the one thing most private equity peeps dread the most–risking–gasp!–their OWN money.
February 20th, 2008 at 5:56 pm
Snow and Quayle are onboard for a reason other than their illustrious records in business. I smell some kind of govt. bailout, and of course it has to come within the next few months. With huge personal debt re. real estate, autos and credit cards, banks being unable to sell commercial holdings and the opaque situation with hedge funds, everything is on very thin ice. If things get bad enough, Cerberus won’t be visible in the rubble.
February 20th, 2008 at 6:11 pm
“Dyspepsia” – yep had to wring out the dictionary. Don’t think the word has much impact even with the superlatives chaser.
As for gov’t bailout. Why do such obtuse companies get the right to be saved by Uncle Sam? If Chrysler went bankrupt – they would go Chapter 11 – doors would stay open and factories running. Management would get cut and a more efficient company would emerge or it’s parts bought out. By bailing out such a poor running company it only delays the inevitable – they are in this position b/c they can’t compete through all the deals that have been done. It’s not their competitors or the world’s fault…it’s their collective own (this includes the unions).
February 20th, 2008 at 6:21 pm
Well if we bail out people who can’t afford their houses, why shouldn’t we bail out equity funds that can’t pay their debts?
Then again, who the hell knows how much money these equity funds have access to anyway? Part of why they are so feared is because they are so secretive.
February 20th, 2008 at 6:35 pm
When I sleep and dream I giggle as the great white captains of industry lose their money in greedy overambition. I snicker and laugh imagining soulless Six-Sigma C-levels bumble their way into poverty.
Those things only happen in my dreams though because in real life this coalition of mega millionaires will most likely f up this whole business at the cost of the livelihoods of thousands of honest American workers and then take some government bailout money or hide behind tax shelters to suffer no personal costs whatsoever.
I hope every single person associated with Cerberus loses their ass on this deal and find themselves regular workaday citizens for a change, with bills and other worries. I know it won’t happen, but I can hope.
February 20th, 2008 at 6:58 pm
Quote jaje
“As for gov’t bailout. Why do such obtuse companies get the right to be saved by Uncle Sam?”
What right does Uncle sam have to tell them they must do business with a company(Plastech) to prevent it from going bankrupt. Missed that part in the Constitution.
When they try to be competitive the government steps in and tells them they cannot have their own tooling that they have payed for. What are they supposed to do?
Anyways I don’t think they will lose their shirt. The government is giving them the perfect cover to sell off what is worthwile and close the rest. Jeep would sell for more than enough to cover their costs and they could dump the rest.
The government actions in a nutshell.
Ronald Reagan
“The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
People can’t understand anymore, but the economy would be a lot healthier if the government stayed out of it.
February 20th, 2008 at 7:06 pm
Cerebus is right; they got Chrysler basically for free. Hard to fuck up free. Worst case scenerio is that they sell Jeep to VW or Honda or Toyota or Hyundai, any patents worth anything to them or BMW or Mercedes, the names “Dodge” and “Chrysler” to some Indian or Chinese car maker who doesn’t know any better, the real estate the plants sit on to condo builders, and shut everything else down. Even if they do that, they will make a profit.
February 20th, 2008 at 8:17 pm
It seems this Feinburg fellow was quite forthright
in the document. How did most react to that? They threw him under the bus !
February 20th, 2008 at 8:33 pm
bluecon:
What right does Uncle sam have to tell them they must do business with a company(Plastech) to prevent it from going bankrupt. Missed that part in the Constitution.
Check out Article 1, Section 8:
“Congress shall have power… to establish… uniform laws on the subject of bankruptcies throughout the United States.”
Most legal systems, including ours, recognize title financing as a type of credit subject to the rules of bankruptcy (the important one here is the “stay on executions” put in place once a reorganization petition is filed). Since the Constitution grants the Federal government the power to regulate bankruptcies (instead of leaving that task to the states), the events of the Plastech saga seem run-of-the-mill to me.
And strictly speaking, Chrysler does not have to continue to do business with Plastech. They can stop accepting parts, stop fronting them money, and idle their assembly lines until they get the needed parts from elsewhere. Or they could have built a spare set of tools and kept them in the shed for use when the supplier goes off line(impractical — I know).
Seeing a supplier of a unique component go into bankruptcy is a fairly common problem for major industrial concerns. The whole business isn’t pretty, but there are very good reasons why laws were passed to regulate bankruptcy — reasons so good that the Framers were moved to insert a special clause into the Constitution on the topic.
February 20th, 2008 at 9:19 pm
Perhaps we will see that day when Cerberus and Enron are listed in the same hall of shame.
As far as “free” being a bargain, just ask the lucky Brits who picked up Rover Cars for free when BMW gave up.
February 20th, 2008 at 9:49 pm
Caption for the picture:
Dieter: “Good luck suckers! You’ll need it.”
February 20th, 2008 at 9:55 pm
Truism: I believe that 99.9% of the Cerberus investors are only concerned about their return on investment.
Cerberus is not a charitable organization.
February 20th, 2008 at 10:20 pm
You would also need to think the Constitution provides that the government has the power provided in the Constitution to seize the property of one party at personal harm to them and give it to the bankrupt party.
NBK-Boston
Check out Article 1, Section 8:
“Congress shall have power… to establish… uniform laws on the subject of bankruptcies throughout the United States.”
February 20th, 2008 at 10:41 pm
Bluecon:
Yes.
I think that the Constitution allows the government to delay, limit or harm the property rights of one party (the creditor) in order to benefit another party (the bankrupt debtor), which really serves to protect the property rights of certain third parties (all other creditors). That’s the whole meaning and purpose of bankruptcy law, and Federal bankruptcy law is one thing for which the Constitution explicitly provides.
I said before that these rules were put in place for good reasons. The reason why it’s a good idea is that while Chrysler suffers because doesn’t get to yank its tooling immediately, Ford and GM are saved from the suffering caused by a complete and immediate collapse of Plastech (which the bankruptcy judge thought would likely happen in Chrysler did yank its tooling), since Plastech also happens to supply them with parts. Chysler similarly benefits from the inability of Ford and GM to destabilize other component manufacturers at short notice. And since bankruptcy is part of the well-established background of commercial law, Chrysler (which has plenty of lawyers) entered into contracts with Plastech knowing what their limits were and what the possible outcomes could be, and should not feel surprised at this time.
February 21st, 2008 at 6:56 am
I’m sure that Cerberus did bite off more than it could chew. But I thought they had a strategy in place to deal with Chrysler. After all, you wouldn’t make that level of an investment without thinking it through, would you….?
I was waiting for Cerberus to do the old “strip and flip”. I agree with Geotpf. Chrysler does have some valuble assest, most notably, its brands. That what happened with Rover. It sold “MG” to China for about £50 million. Incidentally, to the poster who referred to getting Rover for “free”, an investigation was launched into the Phoenix investment group about its handling of Rover. Everyone lost money, but they seems to have quite feathered nests! So, there was more at play there, than just economics.
Personally, I think Cerberus should remember they’re an investment group and strip and flip Chrysler. As it stands, it can’t last much longer, but with a strip and flip? Its marques might survive.
February 21st, 2008 at 9:30 am
Good God. You folks are awfully impatient. Cerberus has barely gotten started to the “strip” phase and you’re already calling for the flip? If there’s one word you can’t use to describe the big three Detroit automotive companies it’s nimble. So, hold your horses. Once they’re done stripping then they can start improving the product to get it to the point where someone else will want to buy it at a price point profit.
February 21st, 2008 at 10:43 am
NBK-Boston
“I think that the Constitution allows the government to delay, limit or harm the property rights of one party (the creditor) in order to benefit another party (the bankrupt debtor), which really serves to protect the property rights of certain third parties (all other creditors). That’s the whole meaning and purpose of bankruptcy law, and Federal bankruptcy law is one thing for which the Constitution explicitly provides.”
The Constitution does not give the government the right to tax one party and give the money to another party. The present laws of the USA may allow this, after the lawyers have fiddled with the Constsitution but it was definately not in the Constitution to allow this. Why live with this sort of regulation when it is easier to move to communist China or socialist India. It is this sort of government meddling that is running the companies out of the country. Hard to believe communist China is more business friendly than the USA.
February 21st, 2008 at 1:10 pm
bluecon:
The Constitution does not give the government the right to tax one party and give the money to another party.
That statement is just plain wrong.
The Constitution clearly gives the federal government the power to tax (also in Art. 1 Sec. 8), and contains no restrictions like the one you suggest on the use of any money it so collects.
At this stage, the only thing I can do is suggest reading up a little on the history, origins and purpose of the federal Constitution. I recently got through Woody Holton’s Unruly Americans and the Origins of the Constitution (Farrar, Straus and Giroux; 2007) and think it is fairly cogent and a pretty good place to start — along with a quick perusal of the original document itself.
February 21st, 2008 at 7:13 pm
I for one never thought that Cerberus had the slightest idea what they were doing when they bought Chrysler. The ego of the Private Equity people at the top of their boom was matched only by some of those in the dot.com boom who truly believed that a new economy had formed, one that required only revenue and investors, not product and profit. The very idea that Cerberus would have to improve a complex product with a long lead time (the cars themselves) in order to make the company attractive enough to sell eliminates Chrysler from being a true “strip and flip”. That none of them had any background in the industry, only “advisors”, made the stench of self delusion even stronger. These were people who made vast amounts of money through their connections and positions at a time when everyone in private equity was making vast amounts of money. But instead of seeing how lucky they were to be competent people in the right industry at the right time, they came to believe that they were so smart and effective that they clearly deserved the millions they were paid, that they deserved artificially low tax rates, and that they could swiftly teach all the old dogs in a highly competitive industry like automobile manufacturing and marketing new tricks. In their minds, the very presence of a “private equity” investment in their management would improve the products, drive down costs, fill the dealers with customers, and then fill the boardroom with deep pocketed potential buyers for the whole company. All thanks to their unparalleled and godlike ability to shuffle paper.
Pure hubris.
BTW: NBK-Boston – thanks for your analysis of constitutional issues…
February 21st, 2008 at 7:30 pm
I want to quickly add that I do believe parts of Chrysler, particularly Jeep, do have value. I just think the complexity of the company’s potential liabilities (existing dealer contracts, customer warranties, existing product line, etc.) inherited by Cerberus the day they took over for “free” greatly exceed any likely upside.