Exactly WHY are we bailing out Cerberus Capital Management?

Last week President Bush announced that you and I are loaning Chrysler $4 Billion. I have a simple question: exactly WHY are we bailing out a profitable, well-connected private company, namely, the company that owns Chrysler, Cerberus Capital Management?

Even when Cerberus Capital Management bought Chrysler in July 2007, it was noted that

The sale of Chrysler (DCX) to private equity giant Cerberus Capital Management hasn't gone through yet, but Standard & Poor's and Moody's Investors Service (MCO) have already rated the soon-to-be independent carmaker's debt as "junk," or below investment grade.

That's not all. Standard & Poor's ratings essentially say that Chrysler could be a recession away from bankruptcy.

Only four months later, Cerberus was already

scrambling to sell assets amid indications of huge losses, as access to cash becomes increasingly scarce, according to a published report Friday.

"Someone asked me, 'Are we bankrupt?'" the Wall Street Journal quoted Chrysler boss Robert Nardelli telling employees at a meeting earlier this month. "Technically, no. Operationally, yes. The only thing that keeps us from going into bankruptcy is the $10 billion investors entrusted us with."

An excellent analysis of this bailout came last week from a perhaps unexpected source, namely, Francis Cianfrocca a/k/a blackhedd on Red State. Here are some highlights of his rant:

[Cerberus is] private, so we have no audited, public financial information to judge them by.

Chrysler has requested a grant of $7 billion in public money, to ensure its survival beyond the beginning of 2009. (I won’t call this a loan, because that would imply an expectation that we’ll get our money back. We won’t, certainly not if this pig of a bailout passes.)
....
Who owns Chrysler LLC? Well, they’re 80% owned by Cerberus Capital Management LP, the private equity fund that bought Chrysler away from Daimler AG.

Cerberus is one of the largest, best-funded, best-managed, and candidly, most-feared private equity firms out there. They’re run by former Treasury Secretary Jack Snow, and there’s a who’s-who of well-connected former political honchos on staff too. This is a firm that can get nearly anyone on the telephone when they need to.

They also have quite a few billion dollars in undeployed capital available. Why don’t they put some into Chrysler?

Because Chrysler is not a company that any investor with a brain would put money into. THAT’S why.

In fact,

[Chrysler CEO] Nardelli acknowledged Friday that he has appealed to Cerberus for help and was turned down. A Cerberus spokesman disputed that notion. "Cerberus and its affiliates have worked tirelessly to assist Chrysler in every imaginable way," he said.

Back to Blackhedd:

And that’s why some of the wealthiest, smartest and most powerful investors in the world want they want the taxpayers, we who presumably are brainless, to put our money into Chrysler, behind theirs.
....
Whenever a privately-owned company has to take on new capital on an emergency basis, the financing entity essentially names their own price. The standard practice is to negotiate as slowly as possible, until the company is days or hours away from going out of business, and then offering the financing so as to value the company at a few pennies on the dollar.

The existing investors usually get the opportunity to participate in the new round, pari passu with the new investors, and they will see their existing shares subordinated to the new shares.

In effect, the new investors cram the existing investors down to nearly nothing.

Now apply this to ... Chrysler.

If we the taxpayers are going to provide emergency financing for th[is] privately-held companies, we need to insist on the standard deal structure.
....
If we don’t do this, then I’ll tell you exactly what will happen next.

Chrysler LLC will be carried on the books of Cerberus as a breakeven. They’ll probably try to find someone else to buy it off them. These billionaires will come out of this without losing much, if anything. Is that what you, as a taxpayer, want to see?

How was Cerberus, a private venture capital company, able to get such a sweetheart deal?

According to the New York Times:

Mr. Snow has personally lobbied Mr. Paulson and others for a federal rescue that would salvage Cerberus’s investments in Detroit. Cerberus has also deployed a corps of lobbyists and former government officials to secure a bailout and protect its interests.
....
[I]f they fail Cerberus and its partners could lose their daring bets on Detroit. Without a bailout Cerberus could lose about $2 billion and suffer a stinging blow to its reputation. With one it might eventually profit from its troubled deals.

Last year, Cerberus and about 100 co-investors bought 80.1 percent of Chrysler for $7.4 billion from the German carmaker Daimler
....
Cerberus does not have much of its own money riding on Chrysler and GMAC. The two investments amount to about 7 percent of its assets under management, and this past July Cerberus and its co-investors lent $2 billion to Chrysler.

This isn't the first huge gift Cerberus has gotten from Congress and the taxpayers this year. At the time of the original Wall Street Bailout, a juicy little tax writeoff provision was inserted in the form of a depreciation credit against taxes, that was drafted so that it could only possibly apply to Cerberus, in an amount up to $30,000,000 a year!

The execrable bailout of Cerberus is only one of the putrescent deals approved by Bush and Paulson. This morning on CNBC, Hank Greenberg, the former CEO of AIG (and far from a saint himself) said that AIG had used much of its Bailout billions to pay off CDO counterparties in full, at par, for securities that most assumed were worth only pennies on the dollar! He openly invited Congress to investigate and find out whether those counterparties who received $billions in a windfall might have included entities like Goldman Sachs.

More and more, the $700 Billion TARP bailout is looking exactly like the horror story that many predicted as soon as Paulson announced his proposal back in September: the mother of all slushfunds, available to the most connected pals of the Administration, on whatever terms they can get away with.

Comments

wow

I've been wondering the same thing. Chrysler basically failed when it was acquired and why they are included is a very good question.

On the other hand, if former Treas. Secretary Snow hadn't been an insider, I wonder if GM would have gotten anything.

But overall, this "bailout" seems to be propping up the executive/investor class and they are simply sucking money out of taxpayer's pockets because it's the last place to suck away money from the middle class.

Paying full price for their CDOs. What is worse, is most Americans I don't think can track on what's going on here.

It's bad enough for those who financial acumen to figure out what's really going on.

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Why are UK taxpayers being asked to bailout Indians companies?

Here is how it seems to work: Indian staffing companies make billions of dollars by replacing western workers. Then those Indian companies use the money to buy established western companies. Once the western companies have been acquired, the first thing the Indian companies do is fire whatever western workers are still there. Try to follow this trend to it's logical conclusion.

Threat of big job cuts at Jaguar and Corus
> Tata, the Indian conglomerate that owns Jaguar Land Rover and Corus, is planning to make thousands of UK workers redundant next month unless they receive government financial backing.

http://www.guardian.co.uk/business/2008/dec/21/jaguar-tata-unemployment-car-industry-corus

Government backing? So Indians replace western workers, makes billions, buys western companies - fires all the western workers there. Then the Indian companies demand a bailout by the western tax payers?

It's almost funny, in a sad kind of way. But, what is also funny, in a strange kind of way, is that the US and UK just roll over and let it happen.

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Citigroup/Financial sector

went and offshore outsourcing hundreds of thousands of jobs also. then Citigroup sold their entire IT to TATA for billions right at the time of the bail out. TATA is the India conglomerate who has made billions by basically undercutting U.S. workers and getting large offshore outsourcing contracts from U.S. firms.

What is more absurd is how this never makes it to the Press. If these companies want U.S. tax dollars one would think a condition should be they have to hire U.S. workers for U.S. jobs at least.

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Trojan Horse

Maybe more people will realise how the Indians (and Chinese) will dominate as outlined by the above post.
We are letting them do it. Off shoring is a illusion and trap. It is doubtful that the savings are really there when you take into account language difficulties, the threat of IP loss, poor quality (software developed offshore is not better) and many other factors.
Throwing whole sections of a business over the wall to be outsourced is simply an abdication of management responsibility.
It strikes me also that a 'strategy' to suppress the cost of labour in the US and UK has backfired and it is now leading to the rapid hollowing out of these economies. This will accelerate as the Chinese and Indians have cash to acquire what are increasingly cheap assets.

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