Posted by: David Welch on August 31, 2009
If there’s any lesson from the downfall of Detroit’s carmakers over the past several years, it’s that it’s that the smart money can’t find an easy solution to Motown’s woes. When private equity giant Cerberus Capital Management said it would buy Chrysler and its lending arm, Chrysler Financial Services, from former parent Daimler AG of Germany in May 2007, the idea was that the financier could bring better management and turn it around. With better cash flow management and the cost-cutting eye of former General Electric executive Robert L. Nardelli, Cerberus could strip out the excess and flip a healthier company a few years later for a profit. As a backstop, Cerberus bosses figured that the loan portfolio at Chrysler Financial alone was worth nearly the $7.4 billion they invested in Chrysler. If the carmaker was a loser, they could make up some losses with the lender.
But it’s been a disaster. The government sponsored bankruptcy at Chrysler has wiped out the investment in the carmaker. Cerberus also bought 51% of GMAC Financial Services from General Motors. GMAC is becoming a lender for Chrysler dealers and customers, so Chrysler Financial is in a wind down phase. Sources close to Cerberus say that the Chrysler investment will cost Cerberus about $1.5 billion even after it brings in the income from the remaining car loans on Chrysler Financial’s books. And GMAC? The Treasury Department has given assistance to GMAC, so Cerberus no longer has controlling ownership. The lender had a massive mortgage business that was hammered with the housing bubble burst.
Couple those problems with a recent report in the Wall Street Journal that investors are fleeing, and it’s clear that Cerberus has fallen on tough times. The WSJ reported that investors are withdrawing $4.77 billion, or 71%, of assets in the firm’s hedge funds. And its main hedge fund, Cerberus Partners, was down 24.5%, the WSJ reported. For its part, Cerberus says that the race to withdraw funds from its hedge fund was due to liquidity issues on the part of some investors, not because of its poor auto investments. But clearly, Cerberus is in the dog house with some of its investors.