Back when the “first” Detroit bailout bill was headed for the President’s desk, U.S. automakers scrambled to justify their $25b call on the public purse. Read the goddamn label, they cried. It’s a LOAN. For building FUEL EFFICIENT CARS. Meanwhile, Michigan Senator Stabenow displayed the political instincts for which she is rightly famous. “It’s about jobs, jobs, jobs,” the Debster decried. Well exactly. And thanks to “jobs, jobs, jobs,” the domestics will get a second, third, fourth and fifth turn at the taxpayer trough. But first, there’s a little business to take care of: Cerberus.
Cerberus Capital Management is the private equity group that bought Chrysler from the Germans. Why they did that is anybody’s guess— provided “strip and flip” are the first words out of their mouth. At the time, Cerberus swore up, down and sideways that theirs was a long-term play. They had deep pockets and they weren’t afraid to use them. Just in case anyone believed them, Cerberus installed the disgraced cost-cutting CEO from Home Depot at the automaker’s helm, and terminated virtually all new product development.
OK, so here we are. Chrysler’s dead in the water. The U.S. car market is dead in the water. Cerberus has a better chance of selling a cup of water to a dead person than off-loading their Chrysler investment at profit, either as a going concern (yeah right) or in parts. To exit their Chrysler debacle “gracefully”– i.e. prop-up the biz until they can off-load it on another sucker– Cerberus would like to draw-down some federal bailout bucks. Only that’s an extremely risky strategy.
Unlike GM and Ford, Cerberus is a going concern. Going very well, in fact. The equity firm’s website claims $100b worth of annual income from its other investments, in industries ranging from aerospace to travel and leisure. Automotive accounts for just eight percent of its total holdings. All of which means Cerberus could actually go the distance with Chrysler. You know; if they wanted to.
Which they bloody well don’t. ‘Cause they’re not stupid. In terms of money and time, Cerberus knows they’d be better off starting a new automaker from scratch than trying to revive a liability-laden, union-stifled, bureaucratically-challenged, over-dealered, product-deficient Chrysler Corporation. Or simply torching a 100 dollar bill every five seconds for the rest of eternity. So, again, Uncle Sam’s mams are looking pretty good to Cerberus right about now.
But not for long. Now that Congress has pissed-away $700b on the “are you SURE we needed to do that?” Wall Street bailout, spending several tens of billions more to “rescue” a private equity firm’s folly is an idea with wings of lead. I mean, eventually. Right now, the average American doesn’t know Cerberus from Adam. Right now, it’s all about “jobs, jobs, joibs.” So now’s a good time to ask for bailout bucks. So now they’re asking.
But the clock is ticking for Cerberus’ political fixers, and they know it. It’s only a matter of time before they’re “outed” [see: today’s Wall Street Journal]. So they’ve devised a suitable plan B: blackmail.
Cerberus is blackmailing GM into buying them. It may be a coincidence that GMAC– 51 percent of which is owned by Cerberus– has cut-off vital floorplan lending to GM dealers. It may be a coincidence that GMAC now requires a FICO score of 740 for a GM loan or lease. And it may not. I repeat: Cerberus has deep pockets. They could shore-up GMAC on their own.
So, if GM buys Chrysler, what’s the bet the GMAC “problem” goes away? More importantly, so does the Cerberus PR problem. In fact, a combined GM and Chrysler would make an even MORE compelling case for federal aid. And, let’s face it, that’s all GM has left now. Without a federal bailout, GM’s dead. And everyone knows it.
Well, not everyone. The average car buyer is still blissfully unaware that GM is a zombie. If he devotes any mindspace to the issue, Joe the Car Buyer thinks GM’s in a spot of bother, what with building all those SUVs and all. If we need to protect blue collar jobs, well, better Detroit than those banker boys or those foreign automakers (did I tell you my wife’s brother bought a new Honda?). By the same token, a merged GM and Chrysler makes perfect sense. Two are stronger than one, right?
In short, to avoid– or I should say forestall– Chapter 11, GM and Chrysler will merge.
During CEO Rick Wagoner’s tenure, GM has always tempered major bad news with a major announcement. So this could be the mysterious revelation scheduled for Friday morning. With or without Treasury Department assistance, I reckon American Leyland is on its way. If it does arrive, one thing’s for sure: Cerberus won’t be around to watch it die.
spot on I’d say
nobody in Wash DC wants to be seen doling out bailout bucks to evil vulture capitalists
and there’s plenty of time to get the American Leyland logo on the Presidential limo for the inauguration
If it was going to happen, it would have already happened. It’s probably a no-go now. Just my opinion.
very well constructed article.
RF, if this TTAC thing doesn’t work out, you can always get a job as a photo editor. Love that pic of Rome’s ruins!
It’d be nice to work Ozymandias into an editorial, but it’d take a lot of sand to bury RenCen …
It’d be nice to work Ozymandias into an editorial, but it’d take a lot of sand to bury RenCen …
Who watches the Watchmen?
Ozymandius
by: Percy Bysshe Shelley
I met a traveler from an antique land
Who said: “Two vast and trunkless legs of stone
Stand in the desert… Near them, on the sand,
Half sunk a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them and the heart that fed;
And on the pedestal these words appear:
My name is Ozymandius, King of Kings,
Look on my works, ye Mighty, and despair!
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.
I met a traveler from an antique land
Who said: “Two vast and trunkless legs of stone
Stand in the desert… Near them, on the sand,
Half sunk a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them and the heart that fed;
And on the pedestal these words appear:
My name is Ozymandius, King of Kings,
Look on my works, ye Mighty, and despair!
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.
I still don’t get why anyone thinks that the bailout will save jobs. If anything, the redundancies in functions such as finance, accounting, HR, will lead to additional white collar layoffs. And the blue collar workers building unwanted Chrysler products are still going to be out of work. In fact, it’s more likely as the product line overlap would be incredible. Is there something I am not getting?
On a more emotional note, this is going to drive a stake through the heart of the Mopar brand faithful.
No way should Cerberus get a bailout when they pull in $100 billion a year. They should be told to “pound sand.”
Focusing on the “Jobs, Jobs, Jobs” issues may be an effective means of getting the money, however, if federal strings attached to the money require that jobs actaully be retained in such a deal, it is going to be a boat anchor to the merged company going forward thereby destroying any chance for success.
Simply put, Jobs have to be shed, money or not.
The Fabulous Ruins Of Detroit
Right on RF,
And once again I ask, will it be jobs or environment? If they continue with the story that the bailout is tied to “green” initiatives within the auto industry can they keep up the sham for 4 years? Eventually, the fact that GM’s only real talent lies in selling trucks will have to rise to the surface.
I love your line about torching $100 bills every 5 seconds for eternity. However, I would kindly suggest to the folks at Cerberus that rather than setting them alight they could simply forward them to me.
I really can’t see the logic in GM buying Chrysler to make sure the bailout bucks hits their shores. I mean, a debt-ridden company with too many brands, models, dealers, factories and workers buys another debt-ridden company with too many and so on. So, if they can pay for Chrysler and make their debts even bigger, why should the government bail them out on that account? I mean, it’s so obviously a trap. Or do they really think that both the government and the people are that stupid? Do they really think people wouldn’t call their bluff?
RF –
Agree with you on the Cerberus motives (they want to sell ASAP before thyey have to spend real money) with the following addendum:
The Chrysler car guys (senior execs) do NOT want to be bought by GM…they realize that they will be marginalized in this transaction and thus have been trying (in vain) to work something out with Nissan, where at least they have a shot at keeping their careers alive….
Great article, and many good comments from the B&B.
It seems to me that you have two (once) great industrial firms in a very dire situation, and a Wall Street shark forcing them into something neither want – one by means of outright ownership, and the other because it sold control of it’s financing arm to said shark (stupid we know, but they were desperate for the cash). This has made what Ford considers to be a strategic asset into a lever to force the General to do what Wall Street want. It may all be legal, but boy does it suck.
Granted GM and Chrysler (because of it’s previous masters) are in a bed very much of their own making, but if you saw this in a school playground you’d call it bullying. I’m no admirer of GMs management – but seeing Rick W being pubically humiliated, when he know he’s lying about protecting jobs is just wrong.
Guess this just confirms what we all know – Wall Street is only concerned with Wall Street’s next quarters earnings and damm the consequences to the rest of the country – or any other country (ever heard of Iceland?) And reminds us of the moral “beware of Greeks bearing gifts” (with sincere apologies to Greece, I’ve had some great holidays there).
BTW it’s not just Ceberus who’s to blame – you can just see all the other bankers and laywers figuring out how to get a piece of the merger and/or C11 action.
One wonders if any of the ‘money men’ (and women – I believe in equality), actually met their fathers.
It doesn’t matter if GM merges with Chrysler or not in the long run, people STILL won’t be buying either manufacturers cars. They either have to downsize so they can find a way to be profitable with a smaller market share, or call it a day and close up shop.
This whole thing works out perfectly for Cerberus. They bought 51% of GMAC, they had control but only had to book half the losses. Now they bully GM into taking Chrysler and giving up the rest of GMAC just as the government gets ready for the bailout.
How about a clause in the bailout plan that no privately owned companies would be supported??
And what does this say about GM management??
If this is indeed what is happening behind the scenes, GM management needs to be sacked for incompetency and Cerberus should not only not be allowed to participate in the bailout but they need to be black-listed in some way.
Don’t these guys understand that there are millions of jobs and lives at stake here??
Corporations are lining up for free money before the Obama gravy train jumps the tracks.
Now look at them yo-yos thats the way you do it
You play the guitar on the mtv
That aint workin thats the way you do it
Money for nothin and chicks for free
-Dire Straits
It really comes down to when the market starts to rebound, (and I don’t predict it to be soon). who will be selling new cars to Americans? Will the bailout by the feds allow GM and whatever it absorbs to sell cars at discounts again (albeit without profits)? Or will There only be a two division GM (chevy caddy possibly jeep) each division selling up to date quality cars? Can GM make up to date quality cars on a regular basis? Will Americans ever again trust the resale price losses they took owning Detroit Iron to buy again? If you can answer these questions, then we will know if there is to be an American based car industry. Or as a pundant once said;”it’s not who is right that counts but who os left”.
This whole thing has “bad idea” written all over it for a number of reasons:
1. Detroit just aren’t building the products people want. In October alone, the sales for “foreign” automakers amounted to 423,853! The scope for sales IS there. It’s just a case of Detroit making the cars to snatch those sales away.
Now the bailout would make a lot of sense if it were to be used to build those cars they need, market them and help buy raw materials to make these cars. But this brings me onto problem number:
2. Management. Unless the bailout has a clause of “complete change of management”, the bailout is further doomed to failure. It will almost ensure that the money will be mis-spent until the next time they go cap in hand to Washington, with a whole new bunch of excuses. Need proof? The SUV era. Lots of profits rolled in, but mysteriously disappeared. What makes this scenario worse, is the fact that Mr Obama will be in power, he will be forthcoming in the handouts which will further deepen the hole in public accounts. That hole will need to be filled (i.e more taxes).
3. If Detroit don’t figure out how to solve problem one, then, what will happen? The bailout will keep people in jobs, building vehicles, that nobody wants. Who wins here? The only end result of this scenario would be Detroit going back, cap in hand to Washington (highlighted in problem 2).
The scary thing is, management are (seemingly) engineering an “American Leyland” behemoth to create a “too big to fail” situation and, thus, secure more bailouts. If only management put the same effort into running the original companies, we might not be in this sorry state of affairs….
Incidentally, I make a prediction that in 5 years’ time, an American TTAC reader will be on a Japanese car website, urging Japanese car companies (running scared from the rising competition from South Korea, India and China) not to make the same mistakes the American car companies did 5 years ago. Much like I’ve done on here for many years…….
Hope for the future!I wouldn’t worry about crappy cars from China “taking over”. In 10 years or so, the present generation of grade- and middle- schoolers will be driving and will want no part of Commie Crap.
My daughter reports that on Halloween, the neighborhood kids threw away all trick-or-treat candy that had “Made in China” printed on the label.
The tykes actually listen to news reports that tell of poison in Chinese foods and dangerous Chinese manufactured goods made in environmentally-filthy factories.
zenith,
Your story gives me hope for the future. Show those tykes a YouTube vid of that Brilliance BS6 flopping hard in a crash test or something…
The proposed merger is typical Detroit thinking. Short term reaction not a long term solution.
I would love to see management’s face if a condition of the loans or bailout was to put together a viable business plan to show they can pay it back. Management would probably all resign tomorrow and open those golden parachutes.