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Cerberus At Axis Of Auto Bailout Debate
Despite saying it would forgo any profits, lawmakers are in no rush to help the firm limit its losses.
November 19, 2008
Despite having Dan Quayle as its chairman, Chrysler's owner, Cerberus Capital Management, maintains an awkward position as the embattled automakers reach out to Congress for a piece of the bailout. The firm, run by billionaire Stephen Feinberg, has pledged that it will forfeit any upside that might be a result of a bailout package, but that show of goodwill rang largely hollow to legislators.
Congressman Steve Kagen (D-Wis.) issued a statement urging lawmakers to strike down any funding for Chrysler until “Wisconsin paper mills are up, running.”
Kagen was more interested in another Cerberus portfolio company, NewPage Corp., which recently shuttered two paper mills, leaving 750 people from northeastern Wisconsin out of work.
"If Cerberus needs to raise cash to bailout Chrysler, then they should sell our idle paper mills in Kimberly and Niagara," said Kagen via a statement. "Local community leaders have given them opportunities to sell--they have turned them down.”
While Kagen’s opposition to automaker aid highlights the “me too” syndrome that can be inherent to any publicly funded rescue package, it also underscores a disconnect between politicians and the inner workings of the private equity business. Kagen’s proposal was for Cerberus to “sell” the shuttered paper mills, and use the proceeds “to keep Chrysler afloat.”
Kagen’s statement, meanwhile, came on the same day that Chrysler chief executive Robert Nardelli appeared before the US Senate Committee on Banking, Housing and Urban Affairs to make his case for the automaker bailout. Nardelli, who appeared alongside the General Motors and Ford chiefs, requested a $25 billion working capital bridge “to survive this liquidity crisis.”
“Our private equity owner, Cerberus Capital Management, LP, has made it clear that it will forgo any benefit from the upside that would, in part, be created from any government assistance that Chrysler LLC may obtain,” Nardelli said, adding that the general partner will enter into “legally binding agreements” that would see any “future profits” turned over to the government.
What is left unsaid, however, is how much those binding agreements would protect Cerberus’ downside in the event of a bailout. Also, while Nardelli specified that Cerberus would forfeit "general partner" profits, the limited partners that invest in Cerberus' funds, which make up the bulk of the firm's capital under management, would not be beholden to the firm's "binding" agreement. Should Chrysler rebound, Cerberus' LPs would be in line to capture the proceeds.
The prospects for an automaker bailout did not seem to improve in light of the Big Three’s efforts. White House Press Secretary Dana Perino said earlier this week that the Bush administration would back an effort to amend a bill allowing automakers to access a planned $25 billion loan sooner, but the Department of Energy’s loan is designated for green projects. It isn’t the “no strings” equity infusion carmakers are looking for.
“We only think taxpayer dollars should go to companies that can show viability and a willingness to make tough decisions to restructure themselves so that they can be successful for the long term,” Perino said at the press briefing.
Meanwhile, pundits have also lined up against the proposed bailout. Mitt Romney, the former Presidential candidate and ex-head of Bain Capital, wrote an op-ed column for The New York Times entitled “Let Detroit Go Bankrupt.” By Romney’s calculation, US automakers pay in excess of $2,000 more per automobile than overseas rivals, attributable to labor agreements and retiree benefits. He also took a swipe at investors, stating: “Don’t ask Washington to give shareholders and bondholders a free pass--they bet on management and they lost.”
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