Dog Days at Cerberus

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Those problems may put a kink in the firm's strategy. Cerberus, which also owns 80.1% of struggling automaker Chrysler, wants to merge the lending operations of both companies. By doing so, it could reap massive savings on back office and loan processing operations, boosting returns at both GMAC and Chrysler.

The unexpected losses at ResCap could forestall a deal. Sources close to Cerberus and GM, which still owns 49% of GMAC, say the situation at ResCap needs to stabilize before they can move forward. If Cerberus can't shore up ResCap, GMAC's credit rating could drop and Chrysler too would suffer.

And even if ResCap can be revived, clearing hurdles with regulators and GM may be tricky. One GM executive who asked not to be named said the carmaker wants to preserve the right to buy back its financing arm one day and doesn't want to pony up more capital.

Cerberus also has its hands full with Chrysler. After backing the carmaker's initial turnaround strategy, dating back seven months, Cerberus' new executives decided they needed deeper cuts. In November, with inventory climbing rapidly, Chairman and CEO Robert L. Nardelli announced the company's second restructuring this year, slashing 10,000 more jobs and reducing production by 400,000 cars.

That will help keep expenses down, but Chrysler's real problem stems from an outdated car line. Most of its top sellers are gas-guzzlers. And its smaller vehicles, especially passenger cars and crossover SUVs, need a complete overhaul to attract buyers in satisfactory numbers.

Cerberus is trying to do both things without laying out more cash. That may prove difficult. When Magna International (MGA) was bidding on Chrysler, the parts maker figured it would need $2 billion up front—in addition to the existing $3 billion annual capital budget—to improve Chrysler's cars and upgrade plants.

Price has said in the past that "failure's not an option" with Chrysler. But the carmaker may require a lot of patience. And lately Cerberus has shown it doesn't have a problem cutting losses when situations prove too dire. The firm sold auto sealant maker GDX International Holdings at a loss in October to private equity firm Wynnchurch Capital. In 2004, Cerberus bought a collection of three houseware brands from Newell Rubbermaid for $310 million. But the newly formed company, Global Home Products, filed for bankruptcy two years later, and Cerberus offloaded the assets for $124 million.

"THEY'RE RUTHLESS"

Not surprisingly, Cerberus has ruffled some feathers with its slash-and-burn approach at those companies. At GDX, it laid off 1,500 workers and reduced the union's medical benefits. After the bankruptcy of Global Home Products, the Pension Benefit Guarantee Corp., a quasi-government group, had to step in and pick up the $8.5 million shortfall at one division's pension fund. Says Gary Bone, president of the United Steelworkers Local 626, which represented some of GDX employees: "They're ruthless."

Meanwhile, Cerberus has bailed on a few deals. In early December, it pulled out of a deal to buy Option One Mortgage (HRB) from H&R Block (HRB) as conditions deteriorated in the housing market. Earlier, Cerberus walked away from its bid for Affiliated Computer Services (ACS), after the ACS's independent directors sought other offers.

Cerberus seems unfazed by it all—and confident that it can turn around the troubled companies. "We believe at the other end of the current deep, dark valley is a sunny one from which we'll emerge with a bunch of great companies," says Price. "We do well in good times and bad."

Welch is BusinessWeek's Detroit bureau chief. Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau .