ElNono
12-06-2008, 10:16 AM
Chrysler’s Friends in High Places
By LOUISE STORY
Published: December 5, 2008
In early November, as America’s automakers grasped for a lifeline from Washington, the Treasury secretary, Henry M. Paulson Jr., placed a call to his predecessor, John W. Snow. The topic: Chrysler L.L.C.
Chrysler is the smallest of the Big Three automakers, but it stands apart from its peers in another crucial respect. While General Motors and the Ford Motor Company are public corporations, Chrysler is controlled by one of the world’s richest and most secretive private investment companies.
That investment company is Mr. Snow’s employer, Cerberus Capital Management, which has used its wealth and deep connections in Washington to shape the debate over the foundering automakers to its advantage.
In recent weeks, 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.
Whether its efforts will work is unclear. But if 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. It also bought a controlling stake in GMAC, the finance arm of General Motors. Since then Chrysler has eliminated more than 30,000 jobs and struggled to keep itself afloat while its sales have plummeted. Cerberus is pressing to have Chrysler merge with G.M., but G.M. has said a tie-up is off the table. Chrysler is asking the government for $7 billion to get through the next few months.
Cerberus, named after the mythical three-headed dog that guards the gates of Hades, has a fierce reputation on Wall Street. Many bankers and investors are reluctant to talk openly about the company, which is renowned, even feared, for its hard-nosed deal-making.
But Cerberus is also pursuing its interests aggressively in Washington, where some lawmakers have questioned why the government should assist the privately owned Chrysler. In addition to Mr. Snow, the firm’s chairman, Cerberus’s Washington hands include Dan Quayle, the former vice president, and Billy J. Cooper, who has worked as partner at the lobbying firm Patton Boggs.
The firm has also hired Arnold I. Havens, a former general counsel of the Treasury Department; John B. Breaux, a former senator from Louisiana; David Hobbs, former assistant to President Bush for legislative affairs; and Christopher A. Smith, former chief of staff in the Treasury. So far this year, Cerberus has spent nearly $2 million on lobbying, while Chrysler has spent $5 million, according to Senate records. Ford has spent more than $5 million and G.M. $10 million.
Mark A. Neporent, the chief operating officer of Cerberus, said his company was focused on doing what was best for Chrysler and its employees, as well as for its own investors. Cerberus has pledged to forgo any fees that it might have collected on its Chrysler and GMAC investments if Chrysler receives money from the government, he said.
“We’re not in this for the money,” Mr. Neporent said in an interview earlier this week.
Such magnanimity would be a departure for Cerberus, which has a history of extracting profits quickly from its investments. The firm was co-founded in 1992 by Stephen A. Feinberg, a former trader at Drexel Burnham Lambert, the now defunct junk-bond powerhouse.
Mr. Feinberg has made a lot of money for himself and his investors. Between 2002 and 2007, as an unprecedented wave of buyouts tore through corporate America, Cerberus pulled money out of its portfolio companies more quickly than its peers in the buyout business, according to a study by Moody’s Investors Service.
“These guys are very financially astute, and they will do whatever the market will bear,” said John Rogers, a senior vice president at Moody’s who worked on the report.
Cerberus has not extracted dividends from Chrysler or GMAC, according to a Cerberus executive. But after Cerberus acquired Chrysler, it quickly split the car company from its finance unit, Chrysler Financial, with the hope of combining Chrysler Financial and GMAC.
Until recently Cerberus was rarely mentioned in Congress or by Chrysler in connection with efforts to stabilize the auto industry. But some lawmakers have begun voicing concern that bailing out Chrysler would amount to bailing out Cerberus. On Friday, Representative Maxine Waters, a California Democrat, pointed to Cerberus’s riches. “It seems to me that Cerberus is doing pretty well,” she said.
In an interview, Representative Elijah E. Cummings, a Democrat from Maryland, said he thought Cerberus should put more of its own money into Chrysler before asking for taxpayers’ help.
“I’m not saying they have to get all the money from Cerberus, but at least show a good faith effort,” Mr. Cummings said. “Chrysler should come back to Congress and say, ‘This is what we’ve asked Cerberus for, and this was their response.’ I think the public is due that.”
Of course, the public shareholders of Ford and General Motors would benefit from an industry rescue too. But it was not supposed to work out this way for Chrysler. When Cerberus bought the company, Mr. Snow, and indeed many in the auto industry, hailed Cerberus as a savior. In the summer of 2007, for instance, Mr. Snow referred to the government rescue of Chrysler in 1979 and suggested that this time, private equity would save Chrysler.
“Over 25 years ago, when Chrysler faced bankruptcy, it turned to the United States government for assistance,” Mr. Snow said at a National Press Club gathering in July 2007. “Today, Chrysler again faces new financial challenges. But it is private investment stepping in to inject much needed support.”
But last week Mr. Snow flew back to Washington to argue for a second rescue for Chrysler. Among those he met with was Robert F. Bennett, a Republican senator from Utah, according to a spokesman for the senator.
At a Senate hearing on Thursday, Mr. Bennett suggested that the government might help the automakers and require that Chrysler merge with G.M. — the outcome that Cerberus, though not Chrysler, favors, according to people familiar with the investment firm’s thinking.
“They are very, very well-connected,” said Harry Cendrowski, a consultant and co-author of the book “Private Equity: History, Governance and Operations.” Senator Bob Corker of Tennessee can attest to that. Last year, he was on vacation when his phone began ringing. It was Mr. Snow, and then Mr. Quayle, both calling on behalf of Cerberus. They wanted the senator to know that Cerberus opposed new fuel efficiency standards, Mr. Corker recalled. Days later, Mr. Feinberg visited Mr. Corker’s Washington office. Mr. Corker told Cerberus he was unmoved.
“I really did feel badly for these guys,” Mr. Corker, a Republican, said. But others point out that Chrysler landed on Cerberus’s lap practically free. The price it and its co-investors paid for their stake was roughly equal to the book value of Chrysler Financial. The car operation was just icing.
Mr. Snow and Mr. Feinberg declined to comment for this article. 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. But its reputation is at stake, and it is eager to keep Chrysler and GMAC out of bankruptcy.
“They made a very big bet on a sector that had a lot of risk in it,” said David Bullock, managing director at Advent Capital Management. Advent, a hedge fund that owns GMAC bonds, wrote a letter this fall encouraging GMAC to become a bank holding company, which would enable it to tap federal money.
“They thought they could change the world,” Mr. Bullock said. “and they didn’t.”
LINK (http://www.nytimes.com/2008/12/06/business/06chrysler.html?_r=1&hp=&adxnnl=1&adxnnlx=1228576273-Sna2PBXefqtdwK6r25HD8Q)
By LOUISE STORY
Published: December 5, 2008
In early November, as America’s automakers grasped for a lifeline from Washington, the Treasury secretary, Henry M. Paulson Jr., placed a call to his predecessor, John W. Snow. The topic: Chrysler L.L.C.
Chrysler is the smallest of the Big Three automakers, but it stands apart from its peers in another crucial respect. While General Motors and the Ford Motor Company are public corporations, Chrysler is controlled by one of the world’s richest and most secretive private investment companies.
That investment company is Mr. Snow’s employer, Cerberus Capital Management, which has used its wealth and deep connections in Washington to shape the debate over the foundering automakers to its advantage.
In recent weeks, 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.
Whether its efforts will work is unclear. But if 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. It also bought a controlling stake in GMAC, the finance arm of General Motors. Since then Chrysler has eliminated more than 30,000 jobs and struggled to keep itself afloat while its sales have plummeted. Cerberus is pressing to have Chrysler merge with G.M., but G.M. has said a tie-up is off the table. Chrysler is asking the government for $7 billion to get through the next few months.
Cerberus, named after the mythical three-headed dog that guards the gates of Hades, has a fierce reputation on Wall Street. Many bankers and investors are reluctant to talk openly about the company, which is renowned, even feared, for its hard-nosed deal-making.
But Cerberus is also pursuing its interests aggressively in Washington, where some lawmakers have questioned why the government should assist the privately owned Chrysler. In addition to Mr. Snow, the firm’s chairman, Cerberus’s Washington hands include Dan Quayle, the former vice president, and Billy J. Cooper, who has worked as partner at the lobbying firm Patton Boggs.
The firm has also hired Arnold I. Havens, a former general counsel of the Treasury Department; John B. Breaux, a former senator from Louisiana; David Hobbs, former assistant to President Bush for legislative affairs; and Christopher A. Smith, former chief of staff in the Treasury. So far this year, Cerberus has spent nearly $2 million on lobbying, while Chrysler has spent $5 million, according to Senate records. Ford has spent more than $5 million and G.M. $10 million.
Mark A. Neporent, the chief operating officer of Cerberus, said his company was focused on doing what was best for Chrysler and its employees, as well as for its own investors. Cerberus has pledged to forgo any fees that it might have collected on its Chrysler and GMAC investments if Chrysler receives money from the government, he said.
“We’re not in this for the money,” Mr. Neporent said in an interview earlier this week.
Such magnanimity would be a departure for Cerberus, which has a history of extracting profits quickly from its investments. The firm was co-founded in 1992 by Stephen A. Feinberg, a former trader at Drexel Burnham Lambert, the now defunct junk-bond powerhouse.
Mr. Feinberg has made a lot of money for himself and his investors. Between 2002 and 2007, as an unprecedented wave of buyouts tore through corporate America, Cerberus pulled money out of its portfolio companies more quickly than its peers in the buyout business, according to a study by Moody’s Investors Service.
“These guys are very financially astute, and they will do whatever the market will bear,” said John Rogers, a senior vice president at Moody’s who worked on the report.
Cerberus has not extracted dividends from Chrysler or GMAC, according to a Cerberus executive. But after Cerberus acquired Chrysler, it quickly split the car company from its finance unit, Chrysler Financial, with the hope of combining Chrysler Financial and GMAC.
Until recently Cerberus was rarely mentioned in Congress or by Chrysler in connection with efforts to stabilize the auto industry. But some lawmakers have begun voicing concern that bailing out Chrysler would amount to bailing out Cerberus. On Friday, Representative Maxine Waters, a California Democrat, pointed to Cerberus’s riches. “It seems to me that Cerberus is doing pretty well,” she said.
In an interview, Representative Elijah E. Cummings, a Democrat from Maryland, said he thought Cerberus should put more of its own money into Chrysler before asking for taxpayers’ help.
“I’m not saying they have to get all the money from Cerberus, but at least show a good faith effort,” Mr. Cummings said. “Chrysler should come back to Congress and say, ‘This is what we’ve asked Cerberus for, and this was their response.’ I think the public is due that.”
Of course, the public shareholders of Ford and General Motors would benefit from an industry rescue too. But it was not supposed to work out this way for Chrysler. When Cerberus bought the company, Mr. Snow, and indeed many in the auto industry, hailed Cerberus as a savior. In the summer of 2007, for instance, Mr. Snow referred to the government rescue of Chrysler in 1979 and suggested that this time, private equity would save Chrysler.
“Over 25 years ago, when Chrysler faced bankruptcy, it turned to the United States government for assistance,” Mr. Snow said at a National Press Club gathering in July 2007. “Today, Chrysler again faces new financial challenges. But it is private investment stepping in to inject much needed support.”
But last week Mr. Snow flew back to Washington to argue for a second rescue for Chrysler. Among those he met with was Robert F. Bennett, a Republican senator from Utah, according to a spokesman for the senator.
At a Senate hearing on Thursday, Mr. Bennett suggested that the government might help the automakers and require that Chrysler merge with G.M. — the outcome that Cerberus, though not Chrysler, favors, according to people familiar with the investment firm’s thinking.
“They are very, very well-connected,” said Harry Cendrowski, a consultant and co-author of the book “Private Equity: History, Governance and Operations.” Senator Bob Corker of Tennessee can attest to that. Last year, he was on vacation when his phone began ringing. It was Mr. Snow, and then Mr. Quayle, both calling on behalf of Cerberus. They wanted the senator to know that Cerberus opposed new fuel efficiency standards, Mr. Corker recalled. Days later, Mr. Feinberg visited Mr. Corker’s Washington office. Mr. Corker told Cerberus he was unmoved.
“I really did feel badly for these guys,” Mr. Corker, a Republican, said. But others point out that Chrysler landed on Cerberus’s lap practically free. The price it and its co-investors paid for their stake was roughly equal to the book value of Chrysler Financial. The car operation was just icing.
Mr. Snow and Mr. Feinberg declined to comment for this article. 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. But its reputation is at stake, and it is eager to keep Chrysler and GMAC out of bankruptcy.
“They made a very big bet on a sector that had a lot of risk in it,” said David Bullock, managing director at Advent Capital Management. Advent, a hedge fund that owns GMAC bonds, wrote a letter this fall encouraging GMAC to become a bank holding company, which would enable it to tap federal money.
“They thought they could change the world,” Mr. Bullock said. “and they didn’t.”
LINK (http://www.nytimes.com/2008/12/06/business/06chrysler.html?_r=1&hp=&adxnnl=1&adxnnlx=1228576273-Sna2PBXefqtdwK6r25HD8Q)