Separation of Powers

[dieseltaylor]

The founders of the US system were keen to provide checks and balances in the constitution.. Perhaps they could not foresee the hybrid beast that would come from mega-companies employing ex-government appointees, elected officials etc to pressure lawmakers for their own purposes.

I am not sure they would have approved of the development

http://www.nytimes.com/2008/12/06/business/06chrysler.html?_r=1&ref=business

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.”

More Articles in Business » A version of this article appeared in print on December 6, 2008, on page B1 of the New York edition.

Free trial. Read the complete New York edition of The Times on computer, just as it appears in print.

[Michael Emrys]

The framers of the Constitution were fairly astute in preventing the accumulation of too much political power in the hands of a single person or group. What they neglected to do (perhaps because they did not see it as in their personal interests to do?) was to write any provisions to block, or at least inhibit, the accumulation of too much economic power in too few hands. Possibly as a consequence, the public at large has not been alert to the dangers posed by that circumstance. Indeed, they seem to take it for granted.

Michael

[costard]

It cuts both ways - having abused any trust they might have used to maintain their reputation, they now find themselves with in a position where nobody is prepared to credit them with an altruistic position. "hard nosed" business practices have earned them lots of money, now they'll have to spend it to gain the opportunity to make more.

The banks are in a similar position - they won't lend to each other because they don't trust each other: because trusting someone has become the definition of a fool in business.

[Bigduke6]

What's the problem? The report is from the New York Times. As a relatively small but nonethess vociferous portion of the reading public would point out, anything reported by the NYT is a product of the Liberal Eastern Elite Media, who (again, according to the NYT's critics) Hate America, Freedom, and Our Heroic Men and Women in Uniform .

Therefore, by that line of thinking, the NYT article fails to establish that a massive financial company is perfectly happy to lobby for government funding to protect billions of dollars potential share price losses because said financial company bought control of a badly-run automotive company and failed to improve management.

No, if the NYT is the propaganda organ that it supposedly is, the only fair interpetation of that article is that the author hates free enterprise, the profit incentive, and the right of every citizen to apply openly and to the best of his ability to his government. And that Cerebus is only interested in the public good, and that Chrysler's sole management problem is a cash flow crunch brought about by unpatriotic product preference on the part of individual car buyers.

I say we just shoot the messenger and go on with our lives.

Well...ok, maybe that was excessive. In fact, I think that was a great article and thanks to DT for posting it. It would have been nicer if the article had given us an idea of how much cash Cerebus has or could raise to bail out this crappy company they're stuck with, i.e., Chrysler.

But even without that information bit we have a general idea: Cerebus has about 7 per cent of its money tied up in Chrysler, and in July they pumped two billion dollars into Chrysler, and clearly it hasn't done much good.

I'd say a reasonable reading of the article is, if the people that own Chrysler can't manage or buy that car company out of a hole, I really wonder if the general public could do any better. Seems to government assistance to Chrysler right now would be good money after bad. Logically, what has to happen is that the crappy management and inefficient operations of Chrysler need to get wiped out, and that smarter managers take over the efficient bits.

Countries and economies frequently go on quite well after the failure of a major automotive company. I'm beginning to think that's what needs to happen here. It's clear Ford is (relatively) fine, all they want is a standby loan guarantee.

GM is more wobbly, but they seem to be of the opinion that with time and new product which they have in the pipeline, they can adapt as well.

Chrysler to me seems to me to be a dud investment. I suspect this "The Big Three Will Fail" talk to a large extent is people connected with Chrysler trying to paint their company problems as issues affecting the entire industry.

[Guest Guest]

deleted per user request

[costard]

Second the thanks to DT for posting the article.

I think the challenge is going to be forging a compromise given the differing hopes of the parties involved: the government wants to keep as many people gainfully employed as possible (keep its taxation income and its citizens relatively happy), the company owners want to keep making money and haven't shown that they give a toss for their employees.

The banks aren't interested in lending money - most of them are in the unfortunate position of having borrowed at high interest rates to cover bad investments and are now needing to service that debt - and not at all to an industry which has deliberately refused to make long term decisions beyond "the government won't let us fail - we're too big". Not surprisingly, the banks aren't prepared to throw money away - why should the taxpayer? BD6 and the NYT are spot on here - the sad bit is that the pain isn't going to be shared out in any sort of democratic fashion; it'll be parcelled out in the biggest lumps to the small guy.

That seems to be the sticking point, the point at which management and the board offer the illusion of a rescue ("If you give us x billion dollars, you won't have to go through this pain.."). The reality is that they cannot be trusted and don't really expect anyone to - they're just playing the game in the hope of scoring another few million each out of the suckers.

The banks have been given enough rope to hang themselves (I don't believe they understand this fact: they still haven't gone through any major cleanout of senior management and are unlikely to whilst their majority shareholders are corporations. i.e. until we see a large number of bankruptcies of some very large corporations, there will be no incentive for change: it is business as usual and the devil take the hindmost). It is unlikely and unnecessary to give the manufacturers the same consideration: they're already history.

[Wildman]

If we can let airlines go bankrupt and be merged with no "goverment bailout" then I see no reason to give one to the "big 3".

Declare bankruptcy, break the Union contract, renogiate cut costs...once they somehow get rid of the pension funds...ala the airlines...they will be in a much better place financially. I forsee bankrupt car companies and the FGDA (I forget the federal pension fund that Northwest sold their pension fund too) picking up the tab...which amounts to a bailout...but of much smaller proportions...and the companies are now is amuch better cost/profit area to actually move the tooling to more fuel efficent vehicles.

I'm not sure about all of you, but my next car will be a smaller more fuel efficient vehicle...and until the "Big 3" finally make a decent midsize car no amount of money will save them.

[gunnergoz]

I think the banks should have been allowed to be hoisted by their own petards, let the mortgage-backed securities be sold at market value, and the government opened new banks with the bailout funds, with the mandate to lend, lend, lend (to properly screened borrowers, mainly small and medium sized businesses.)