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December 07, 2008

Cerberus at the Gates of Hell

Cerberus Capital Management understands the virtues of bankruptcy. Much of its business has been buying companies or their assets out of bankruptcy and then reselling them as going businesses – presumably that's why they took the name of the three headed dog who guards the gates of Hades. As Cerberus knows well, bankruptcy strips away many of the original causes of failure, gets rid of stockholders, and reduces the claims of bondholders to whatever pittance they can recover from the estate.

But now the shoe is on the other paw. Cerberus owns most of Chrysler and a majority of GMAC. The best chance for salvaging some value out of the assets of these entities would be bankruptcy – years of bad decisions and bad contracts would be swept away. If they weren't the owner, Cerberus might be an eager buyer –only after bankruptcy, of course. But, if Chrysler goes bankrupt, Cerberus probably loses a few billion that it put into the company and its bragging rights. Apparently this doesn't endanger Cerberus but it wouldn't be fun.

So why doesn't Cerberus bailout Chrysler, some Congresspeople have asked? According to The Wall Street Journal, "[Chrysler CEO] Nardelli acknowledged Friday that he has appealed to Cerberus for help and was turned down. A Cerberus spokesman disputed that notion. "Cerberus and its affiliates have worked tirelessly to assist Chrysler in every imaginable way," he said."

Cerberus' imagination is somewhat limited but they have been helping. According the New York Times, Cerberus spent nearly $2 million of its own money on lobbying in addition to the $5 million that Chrysler dished out. And don't think Cerberus doesn't know how to lobby; their Chairman is John Snow, Paulson's predecessor as Treasury Secretary. The Times says that Paulson called Snow, not the other way around, as the auto crisis began to unfold. The Cerberus lobbying team also includes Dan Quayle; "Arnold I. Havens, a former general counsel of the Treasury Department; John B. Breaux, a former senator from Louisiana; David Hobbs, former assistant to President Bush for legislative affairs; and Christopher A. Smith, former chief of staff in the Treasury." No doubt they're all helping "tirelessly" – but they're not putting any more money in and they probably don't help make cars.

Cerberus has made a concession, however. It has promised not to collect any fees it may have been due on its Chrysler and GMAC investments if they get bailed out. That's not very big-hearted since they now stand to lose all their investment and that of their coinvestees in Chrysler. The Times quotes Cerberus COO Mark Neporent as saying "we're not in this for the money." Oh. That's probably not welcome news to those who've invested their money with Cerberus but, on the other hand, I'm sure they don't believe it.

The point is that the best chance of salvaging car-making assets and car-making jobs is a Chapter 11 bankruptcy. That's as true of publicly owned GM as it is of privately owned Chrysler. The irony is that Cerberus has turned its three heads in the other direction.

Full disclosure: In by far the worst business decision of my life (which I thought was right at the time, of course), I recommended the sale (actually a reverse merger) of ITXC, the company Mary and I founded which was NOT bankrupt, to a Cerberus-owned entity. I stayed on for a while as non-executive Chairman and left under unpleasant circumstances. I did learn from Cerberus, however, that bankruptcy frees assets for constructive redeployment and can save jobs. It's true even if Cerberus happens to be the owner of the assets that need to be unencumbered.



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