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Cerberus Capital Management, the big hedge fund named after the mythical three-headed beast that guards the gates of Hell, generated a lot of headlines earlier this week when it picked controversial former Home Depot CEO Robert Nardelli to lead its $7.4 billion buyout of Chrysler. Meanwhile, another part of the Cerberus portfolio was skidding off the road.
Houston-based Aegis Mortgage, once one of the thirty largest home lenders in the country, announced on August 7 that it would stop making new loans and lay off a substantial number of its 1,200 employees. The Houston Chronicle reported yesterday that Aegis had notified its departing staffers that it wasn’t sure if they would get severance pay. The company also told them it was terminating the company health plan, which means employees won’t even be able to extend their coverage through the federal program known as Cobra. A spokesperson for Aegis had no comment.
Cerberus, which has positioned itself as a savior of the American automobile industry, won’t generate much love from workers in heavily-unionized Detroit if it treats its employees like that.
Founded by former Drexel Burnham Lambert trader Stephen Feinberg, Cerberus made a name for itself investing in distressed debt. Its timing may be off in the mortgage market, however. In April of 2006 Cerberus led a group that bought 51% of General Motors Acceptance Corp., the finance arm of the big auto maker, in a $14 billion transaction. On July 30 of this year, GMAC announced that’s its second quarter earnings were half that of the previous year, due to large losses in its mortgage arm. In April Cerberus contracted to buy H&R Block’s Option One mortgage unit for $300 million. On August 6, Block announced additional layoffs and restructuring efforts at the unit and said the sale might not close until December.
In May, Richard Thompson, the co-founder and former chief exec of Aegis, sued Cerberus and Feinberg, claiming the investment firm mismanaged the business and diluted the value of Thompson’s 15% stake. Thompson claims he was fired in October of 2006 and replaced by a “revolving door” of chief execs—four in six months—with no experience in sub-prime lending, the area that was causing Aegis and the industry the most grief.
Among the new managers was James Jones, a banker whom the suit says spent so much time on Cerberus’ GMAC investment that it became a “running joke” at Aegis that Houston was where Jones went to take his Cerberus-related conference calls. Jones, who now heads GMAC’s mortgage business, declined to comment through a spokesperson. A Cerberus spokesperson said it did not comment on litigation.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.