May 2, 2009 - Cerberus and Chrysler, Detroit MI

At Chrysler, From Hero to Zero

Cerberus's Promising Turnaround Plan Never Got Past First Gear

At Chrysler, From Hero to Zero

Chrysler early last year was so flush with cash and optimism that the firm's owners decided to repay a $3 billion loan to its lenders, believing that a turnaround for the company was just about to begin.

Now days after Chrysler's historic bankruptcy, those owners, who work at private-equity firm Cerberus Capital Management, consider that repayment a misstep. Keeping the money might have spared Chrysler from taking billions of dollars in government aid and perhaps even prevented the storied automaker from winding up in court.

In an interview, Cerberus chief executive Stephen Feinberg reflected on the irony of the situation: If Cerberus hadn't been so successful in its initial restructuring, he said, it wouldn't have been so quick to pay down its bank debt.

When Chrysler filed for bankruptcy this week, analysts attributed the company's decline largely to the recent turmoil in the economy, which had scared off car buyers and made loans difficult to come by. But there were also strategic blunders, and Cerberus paid a heavy price. It lost its entire equity stake in Chrysler after the government moved to restructure the company.

The private-equity firm had big plans to restore the American icon to its former glory. And it had a good track record: It had already tackled a number of troubled household names -- Albertsons supermarkets, Mervyns department stores, Alamo and National rental cars -- all to great success.

At first, it seemed Cerberus would be able to repair Chrysler, too. It shed $5 billion in fixed costs, cut production expenses by a third and eliminated debt problems. Chrysler was set to break even if the American auto industry sold as few as 11 million cars and trucks a year -- much lower than the industry's projections of 16 million.

Just as the economy began to sour, Cerberus began investigating in several strategic alliances. It urged GM to acquire Chrysler. It considered a partnership with Nissan. And it proposed sharing technology and distribution networks with Italy's Fiat.

"They didn't have a whole lot of time," said Aaron Bragman, an analyst at IHS Global Insight. "They purchased the company and installed leadership in time for it to all go downhill."

Cerberus had failed to heed the example of rival Ford, which in 2006 mortgaged all of its assets to secure billions of dollars in loans and amass a huge cash stockpile. Ford's actions were viewed as an act of desperation by some analysts at the time, but they are now hailed as prescient. Ford is the only major American automaker to forgo loans from the government during the economic crisis.

Late last year, Cerberus realized it would not be able to save the company and began working with the Treasury Department on a bailout. The move sparked public outrage after Cerberus refused to sink any more of its own money into the automaker. Cerberus, which has $27 billion in assets under management, insisted it could not act like an ATM, shifting large amounts of capital to any single investment.

Attacked by Congress and in editorials, the company faced a public relations nightmare. Cerberus believed it was best to keep its nose to the grindstone. But by avoiding public appearances, it was labeled as secretive and ruthless as its mythological namesake, the three-headed dog that guards the gates of hell.

"These guys are smart, talented, aggressive people," said David Stowell, professor of finance at Northwestern University's Kellogg School of Management. "But they're really taking one on the chin."

Feinberg insists the firm was looking out for its investors and only had one goal.

"It's about saving the company and doing the best thing for the country," Feinberg said. "I wish we could do it without government money."

Cerberus said it cooperated fully with the government as restructuring talks got underway. President Obama this week praised outgoing chief executive Robert L. Nardelli, a Cerberus hire, for his efforts. (Thomas W. LaSorda, the company's second in command, announced that he is stepping down, as well).

Feinberg said that up until the final hours before Chrysler's deadline to restructure this week, he sat inside the Treasury, working on scenarios to remedy Chrysler's financing for customers and dealers. Cerberus already owned a large stake in GM's finance arm, GMAC. In purchasing Chrysler, it also gained its finance unit, Chrysler Financial.

Cerberus presented Treasury with multiple solutions: Chrysler Financial could become a bank. Other banks could take over the financing. It could be funded by the Treasury's financial rescue plan. Or GMAC and Chrysler Financial could merge.

In the end, GMAC was assigned to take over financing for Chrysler's dealers and customers.

Some of Chrysler's creditors balked at the government's plan -- but not Cerberus, knowing that it could have lost not just its investment in the automaker but the value of its stake in the financing arm, as well.

"We're not running away," Feinberg said. "We could act as extortionists, but that's not us."

Original Story - Washington Post