Chrysler's Hidden Coffers
Dan Gerstein 12.10.08, 12:01 AM ET
When I wrote about the bailout blunders of the auto industry two weeks ago, I thought the Big Three had most likely topped out on the political outrage meter. But that was before the shady story of Cerberus, the uber-connected private equity firm that owns Chrysler, reared its three ugly heads over the weekend.
Buried on the business page of The New York Times Saturday were the details of Detroit's biggest snow job yet--literally as well as figuratively. Turns out that Cerberus CEO John Snow, who spent three-and-a-half lackluster, and some might say lap-doggish, years as President Bush's second Treasury secretary, is leading a who's who of crony capitalists in a lobbying campaign for a taxpayer bailout to "salvage Cerberus' investment in Chrysler."
That's right. Not to save the jobs of Chrysler employees or America's disappearing manufacturing base, mind you, but to prevent "one of the world's richest and most secretive private investment companies" from having to take a relatively modest financial hit and use some of its own capital to prop up the smallest of the major automakers.
Of course, Cerberus is sparing no expense to spare their investors any exposure. Together with Chrysler, it has spent $7 million to hire such high-rent lobbyists as Dan Quayle (who runs one of Cerberus' international units), former Sen. John Breaux (D-La.) and former Bush legislative liaison David Hobbs. Their goal: $7 billion from the auto industry bailout package Congress is working on now and another $8.5 billion in loans from the Energy Department that have already been authorized.
The more I dug into this private duplicity, the more nostalgic I got for the PR stupidity of the Big Three CEOs and their corporate jets. It smells that bad of boondoggle. And even worse, somehow this stink has largely escaped the detection and scrutiny of the bipartisan leadership of Congress. Indeed, both sides seem ready to compound their complicity in the lousy deals that Henry Paulson cut in the Wall Street bailout by handing over billions more to Chrysler without forcing the Snow men at Cerberus to show why they need it.
At a bare minimum, there is something deeply unseemly and unsettling about one influence-peddling ex-Treasury secretary using his special access to personally lobby his even more bank-beholden successor for favors. If I were running the House or Senate banking committees, I would be asking some tough questions about this conflict of interest cornucopia before giving Chrysler a dime--starting with what kind of financial connections Paulson's old firm, Goldman Sachs, has to Cerberus.
But that's the least of it. I am not a finance expert, but what makes this episode so outrageous is that even a casual observer can see what a taxpayer ripoff Cerberus appears to be getting away with--but Congress and the Bush administration somehow cannot or will not. Why are they unable tell the obvious difference between General Motors and Chrysler? GM is broke, can't get a loan and is actually facing an emergency. Via Cerberus, on the other hand, Chrysler has access to loads of capital, and the only thing collapsing is its credibility.
All it takes to figure this out is a quick Google search, which yielded the following facts.
Last year Cerberus and about 100 co-investors bought an 80% stake in Chrysler and its financing arm at what financial analysts universally say was a fire sale price of $7.4 billion. (Cerberus' own stake was $2 billion.) Business Week described it as Cerberus getting Chrysler "essentially gratis."
To date, Cerberus has barely tapped any of its massive holdings--its investments in Chrysler are estimated to be just 7% of its assets under management--to stabilize Chrysler's precarious finances; the exception was a $2 billion loan in July. Instead, the company has shed 30,000 jobs, a specialty of cost-cutting corporate flip artists like Cerberus.
The main reason for that slimming down? Cerberus has been anxiously trying to fit into its Wall Street wedding gown. According to close followers of the auto industry, Snow and company have been courting GM for a merger with at least the same fervor as it has lobbied the government for a bailout. They almost had a deal a few weeks ago, but GM backed out and is apparently refusing any marriage proposals for the foreseeable future.
Now Cerberus is looking for the taxpayers to buy them time before they can get a buyout. And to add insult to fiduciary injury, the company has not offered to put any of its money at risk to match the government relief dollars and show good faith to the taxpayers. The best they could do, according to the Times, was to pledge to forgo any fees that it might have collected on its investments if it receives a government loan.
"We're not in this for the money," said Cerberus COO Mark Neporent, in what easily qualifies as the most laughable statement in American politics since Sarah Palin said seeing Russia qualified her to be commander in chief.
At least some members of Congress can see through this high-sheened con game. At hearings on Capitol Hill last week, a few backbenchers--led by Sen. Bob Corker (R-Tenn.) and Rep. Ginny Waite-Brown (R-Fla.)--aggressively challenged Chrysler CEO Bob Nardelli to explain why Cerberus won't use any of its cash to keep Chrysler afloat.
Nardelli vaguely answered that "fiduciary responsibilities" to other investors precluded such a cash infusion. Translation: My three-headed dog ate my homework.
What exactly are those obligations? And why do they trump Cerberus' obligations to Chrysler's employees, the hundreds of thousands of other Americans whose jobs rely on the Big Three's survival--and most important, to America's taxpayers?
We don't know because Cerberus is a shadowy private company that uses its lobbying clout to keep its books and entanglements hidden from public scrutiny. And we won't know unless the House and Senate leadership--and, ideally, President-elect Barack Obama--demand a modicum of accountability.
First, as a taxpayer and now putative auto industry banker, I would like to know exactly how much money Cerberus controls and what its liquidity is right now. If you want us to open our wallets, first open your books--all of them.
Then I would like to hear from John Snow's mouth, in public testimony under oath, why Cerberus cannot use any of its other assets to stop Chrysler from running out of cash and going under. Is this really a dire emergency? Or just more back-room rent-seeking from hypocritical free-market apostles?
Third, I would like to find out what happens to our tax dollars if Chrysler and GM end up eloping after the bailout. Does it really make sense to give bailouts to both companies if all they are going to do is hand them--and multiple redundancies--to each other?
Fourth, if Cerberus is not willing to make an investment in Chrysler's future and show that it can be trusted to run this company responsibly, Obama and Congress should seriously consider taking the company out of Cerberus' hands and putting it into a government-appointed receivership. The President-elect said Sunday that he is no fan of nationalization, and neither am I, but it sure seems more appealing at this point than the alternative.
More than anything, I want our elected leaders to stand up to this pinstriped pressure campaign and live up to their fiduciary responsibilities. Ask the tough questions that Chrysler's owners are, ahem, Dodging. Insist that they share in the sacrifice. And if they refuse, make clear that Hades will freeze over before we give these well-heeled hounds a free federal lunch.
Dan Gerstein, a political communications consultant and commentator based in New York, is the founder and president of Gotham Ghostwriters. He formerly served as communications director to Sen. Joe Lieberman (D-Conn.) and as a senior adviser on his vice presidential and presidential campaigns. He writes a weekly column for Forbes.com.
Dan Gerstein 12.10.08, 12:01 AM ET
When I wrote about the bailout blunders of the auto industry two weeks ago, I thought the Big Three had most likely topped out on the political outrage meter. But that was before the shady story of Cerberus, the uber-connected private equity firm that owns Chrysler, reared its three ugly heads over the weekend.
Buried on the business page of The New York Times Saturday were the details of Detroit's biggest snow job yet--literally as well as figuratively. Turns out that Cerberus CEO John Snow, who spent three-and-a-half lackluster, and some might say lap-doggish, years as President Bush's second Treasury secretary, is leading a who's who of crony capitalists in a lobbying campaign for a taxpayer bailout to "salvage Cerberus' investment in Chrysler."
That's right. Not to save the jobs of Chrysler employees or America's disappearing manufacturing base, mind you, but to prevent "one of the world's richest and most secretive private investment companies" from having to take a relatively modest financial hit and use some of its own capital to prop up the smallest of the major automakers.
Of course, Cerberus is sparing no expense to spare their investors any exposure. Together with Chrysler, it has spent $7 million to hire such high-rent lobbyists as Dan Quayle (who runs one of Cerberus' international units), former Sen. John Breaux (D-La.) and former Bush legislative liaison David Hobbs. Their goal: $7 billion from the auto industry bailout package Congress is working on now and another $8.5 billion in loans from the Energy Department that have already been authorized.
The more I dug into this private duplicity, the more nostalgic I got for the PR stupidity of the Big Three CEOs and their corporate jets. It smells that bad of boondoggle. And even worse, somehow this stink has largely escaped the detection and scrutiny of the bipartisan leadership of Congress. Indeed, both sides seem ready to compound their complicity in the lousy deals that Henry Paulson cut in the Wall Street bailout by handing over billions more to Chrysler without forcing the Snow men at Cerberus to show why they need it.
At a bare minimum, there is something deeply unseemly and unsettling about one influence-peddling ex-Treasury secretary using his special access to personally lobby his even more bank-beholden successor for favors. If I were running the House or Senate banking committees, I would be asking some tough questions about this conflict of interest cornucopia before giving Chrysler a dime--starting with what kind of financial connections Paulson's old firm, Goldman Sachs, has to Cerberus.
But that's the least of it. I am not a finance expert, but what makes this episode so outrageous is that even a casual observer can see what a taxpayer ripoff Cerberus appears to be getting away with--but Congress and the Bush administration somehow cannot or will not. Why are they unable tell the obvious difference between General Motors and Chrysler? GM is broke, can't get a loan and is actually facing an emergency. Via Cerberus, on the other hand, Chrysler has access to loads of capital, and the only thing collapsing is its credibility.
All it takes to figure this out is a quick Google search, which yielded the following facts.
Last year Cerberus and about 100 co-investors bought an 80% stake in Chrysler and its financing arm at what financial analysts universally say was a fire sale price of $7.4 billion. (Cerberus' own stake was $2 billion.) Business Week described it as Cerberus getting Chrysler "essentially gratis."
To date, Cerberus has barely tapped any of its massive holdings--its investments in Chrysler are estimated to be just 7% of its assets under management--to stabilize Chrysler's precarious finances; the exception was a $2 billion loan in July. Instead, the company has shed 30,000 jobs, a specialty of cost-cutting corporate flip artists like Cerberus.
The main reason for that slimming down? Cerberus has been anxiously trying to fit into its Wall Street wedding gown. According to close followers of the auto industry, Snow and company have been courting GM for a merger with at least the same fervor as it has lobbied the government for a bailout. They almost had a deal a few weeks ago, but GM backed out and is apparently refusing any marriage proposals for the foreseeable future.
Now Cerberus is looking for the taxpayers to buy them time before they can get a buyout. And to add insult to fiduciary injury, the company has not offered to put any of its money at risk to match the government relief dollars and show good faith to the taxpayers. The best they could do, according to the Times, was to pledge to forgo any fees that it might have collected on its investments if it receives a government loan.
"We're not in this for the money," said Cerberus COO Mark Neporent, in what easily qualifies as the most laughable statement in American politics since Sarah Palin said seeing Russia qualified her to be commander in chief.
At least some members of Congress can see through this high-sheened con game. At hearings on Capitol Hill last week, a few backbenchers--led by Sen. Bob Corker (R-Tenn.) and Rep. Ginny Waite-Brown (R-Fla.)--aggressively challenged Chrysler CEO Bob Nardelli to explain why Cerberus won't use any of its cash to keep Chrysler afloat.
Nardelli vaguely answered that "fiduciary responsibilities" to other investors precluded such a cash infusion. Translation: My three-headed dog ate my homework.
What exactly are those obligations? And why do they trump Cerberus' obligations to Chrysler's employees, the hundreds of thousands of other Americans whose jobs rely on the Big Three's survival--and most important, to America's taxpayers?
We don't know because Cerberus is a shadowy private company that uses its lobbying clout to keep its books and entanglements hidden from public scrutiny. And we won't know unless the House and Senate leadership--and, ideally, President-elect Barack Obama--demand a modicum of accountability.
First, as a taxpayer and now putative auto industry banker, I would like to know exactly how much money Cerberus controls and what its liquidity is right now. If you want us to open our wallets, first open your books--all of them.
Then I would like to hear from John Snow's mouth, in public testimony under oath, why Cerberus cannot use any of its other assets to stop Chrysler from running out of cash and going under. Is this really a dire emergency? Or just more back-room rent-seeking from hypocritical free-market apostles?
Third, I would like to find out what happens to our tax dollars if Chrysler and GM end up eloping after the bailout. Does it really make sense to give bailouts to both companies if all they are going to do is hand them--and multiple redundancies--to each other?
Fourth, if Cerberus is not willing to make an investment in Chrysler's future and show that it can be trusted to run this company responsibly, Obama and Congress should seriously consider taking the company out of Cerberus' hands and putting it into a government-appointed receivership. The President-elect said Sunday that he is no fan of nationalization, and neither am I, but it sure seems more appealing at this point than the alternative.
More than anything, I want our elected leaders to stand up to this pinstriped pressure campaign and live up to their fiduciary responsibilities. Ask the tough questions that Chrysler's owners are, ahem, Dodging. Insist that they share in the sacrifice. And if they refuse, make clear that Hades will freeze over before we give these well-heeled hounds a free federal lunch.
Dan Gerstein, a political communications consultant and commentator based in New York, is the founder and president of Gotham Ghostwriters. He formerly served as communications director to Sen. Joe Lieberman (D-Conn.) and as a senior adviser on his vice presidential and presidential campaigns. He writes a weekly column for Forbes.com.
