Cerberus Promises to Give Up Nothing for Something

The private equity business has been ravaged over the past 16 months; perhaps no firm has lost their mojo faster than the dogs at Cerberus Capital Management.

PE professionals are busy scrambling to keep their heads above water, but the professionals at Cerberus are going from guarding the gates of hell to checking in to Hades for an extended stay.

Under the old rules of capitalism their buyout of Chrysler Corporation would probably result in their entire $7.4 billion investment being written down to zero, although you have to admit they saw it coming:

February 2008
Some of the possible failure scenarios include a nasty recession, an extreme slowdown in the car market, or a further credit downturn. Credit is already looking green around the gills, and the potential for a widespread domino effect that starts with an implosion of the teetering mortgage business would be catastrophic for Chrysler Financial and GMAC, of which Cerberus owns 51 percent.

They were 3 for 3 on those scenarious, and are in desperate straits. The former masters of the universe are the latest to get in line for a helping hand, although they are careful on the wording:

Cerberus Capital Management LP, the buyout firm that owns Chrysler LLC, would forgo any profit from a future sale of the automaker should it receive federal financial aid.

Chrysler also expects the U.S. government to take a stake in the company in any bailout, Chief Executive Officer Robert Nardelli said today at a conference in Palm Desert, California.

Cerberus founder Stephen Feinberg ``has basically gone on record saying he would forfeit'' profit on a Chrysler sale in those circumstances, Nardelli said. ``This would not be supporting a private-equity company with government funds.'' Bloomberg

Guarding the Gates of Hell, but no match for Pit Bulls in Detroit
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The no-profit pledge may help ease political opposition in Washington to an industry rescue, because Chrysler is the only one of the three U.S. automakers that isn’t publicly traded. Cerberus bought 80.1 percent of Auburn Hills, Michigan-based Chrysler from Daimler AG in 2007 for a $7.4 billion investment....Should Chrysler receive any aid and then be sold, any profit would be returned to the federal government, said Tim Price, a Cerberus partner who acts as a spokesman for the firm.

Cerberus no doubt would prefer a return of some of the investment, as opposed to a zero, which they are virtually guaranteed if the government does not lend a hand.

Their public pronouncement might be designed to snooker members of Congress, because it seems to me are giving up nothing.

Cede Profits?

Cerberus sold off a good chunk of the Chysler deal to shops like York Capital, DB Zwirn and Citigroup after they bought it, but are still on the hook for a few billion dollars. Luckily for them they never invest more than 5% of their assets in any one deal. But they burned some of their buddies who came in on their Detroit deals:

2006
Cerberus invited about 50 hedge funds to its Park Avenue office for a presentation by its chief administrative officer, Seth Plattus.

“It was a ‘trust me’ kind of trade,” says one investor, who bought a small piece of GMAC. “You had no time to do real due diligence. But it was a hot deal and everybody wanted in as part of the gang.”

Many of the people who took part in the deal were friends of Steve Feinberg, founder of Cerberus, and said they invested as a sign of faith in him. Some of the investors also say they made returns of up to 35 per cent after Cerberus invited them into its deal for Aozora.

“They had the wind at their back and got carried away by the momentum,” says the head of one fund of funds that declined to take part. “There was an element of the greater fool theory to it.” FT

Now I find their actions comical; they made their bed, and it is time to lie in it. I sincerely hope they can work out of this jam, but as five hedge fund managers said today before Congress, alternative asset management shops have not taken a dime of government money. Of course, there is a first time for everything.

Cerberus screwed up, and now they need to man up. After all, they are in Detroit, not Greenwich or the Upper East Side.

If I had anything to do with it , there would be no soup for Cerberus, and they can go to the back of the line.
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Chrysler Video making the case for assistance-your Private Equity dollars hard at work!

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The Democrats are punting during the Lame Duck session, according to Tech Ticker.

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Cerberus Would Cede Profit in Chrysler Sale in Rescue
Bloomberg

February 2008
Cerberus gives reasons why Chrysler could flop
Autoblog

Previously

June 1, 2008
Investors share GMAC and Chrysler woes
FT

August 25, 2007
Where Are the Howls From Grantham’s Growls?
1440 Wall Street
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

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