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.
[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.