Tuesday, February 19, 2008

A Savior for Chrysler? Read On

In a letter to investors about the state of Cerberus Capital Management’s investments in Chrysler and GMAC, the firm’s founder, Stephen Feinberg, came off sounding at turns cavalier and ruthless, says Andrew Ross Sorkin in his latest DealBook column.

“We do not need to be heroes to earn a good return on the investment in Chrysler,” he said, which Mr. Sorkin suggests that he has no ambition to reinvent the troubled American automobile industry. Cerberus, after all, bought Chrysler on the cheap.

A Savior for Chrysler? Read On


“We despise all the public attention we are getting,” Stephen Feinberg, the secretive founder of Cerberus Capital Management, wrote to his investors last month. “We do our best to avoid the spotlight, but, unfortunately, when you do some large deals, such as Chrysler and GMAC, it is hard to avoid.”

Well, yes — and a letter like this certainly won’t help. Many Wall Street deal makers were shocked by it, BlackBerrying the letter around town with exclamation points in the subject line. One moment, Mr. Feinberg sounded cavalier about the prospects for the companies he controls. The next, he seemed cold and ruthless.

Cerberus is, of course, the hedge fund-cum-private equity firm that bought Chrysler last year for next to nothing. Mr. Feinberg is the brains behind the operation, but John W. Snow, the former Treasury secretary, is the frontman. Mr. Snow is trotted out for press conferences and interviews because of Mr. Feinberg’s self-described “disdain” for publicity. Dan Quayle, the former vice president, is also on the payroll.

To Mr. Feinberg’s apparent dismay, Cerberus — named for the mythical three-headed dog that guards the entrance to the underworld — has grabbed a lot of headlines lately. The reason is that people can’t stop speculating about whether its investments, notably Chrysler and GMAC, the former financing arm of General Motors, are going to go under.

Cerberus, which got into the private-equity game late, made perhaps the riskiest bets at the peak of the buyout boom. Indeed, if there is one buyout portfolio that Wall Street worries about most, it is Cerberus’. (Apollo Management, with its investment in Realogy, the real estate company, and Linens ‘n Things, is perceived as a close second, though I’m not sure we need to worry about them just yet.)

But Cerberus, more than any other private-equity firm, also finds itself thrust into the spotlight for another reason: It bought an American icon. If Chrysler, which has $18 billion in pension and health care liabilities for at least the next two years, winds up sinking into bankruptcy, it would be a watershed event. Such a failure might take down the entire private-equity industry — everyone in the business, bystander or not, would be tarred. It would be on the 6 o’clock news. Mr. Feinberg would be hauled in front of Congress. It would be considered a national crime. Remember the outcry when Kohlberg Kravis Roberts bought RJR Nabisco for $25 billion back in the 1980s? That was just a dress rehearsal.

No wonder regulars at The Four Seasons are nervous.

Mr. Snow has tried to paint Cerberus as Chrysler’s savior. In a speech to the Detroit Economic Club in July, he said that private equity in general and Mr. Feinberg’s firm in particular offer “perhaps the last, best hope of turning around the auto industry and basic manufacturing in the U.S.”

Which is why it is so disturbing to read Mr. Feinberg’s letter, which sounds downbeat about the economy and, at times, indifferent to the firm’s investments.

“We do not need to be heroes to earn a good return on the investment in Chrysler,” he said, suggesting he has no ambition to reinvent the troubled American automobile industry. Cerberus, after all, bought Chrysler on the cheap.

“We do not need to transition the car industry or even to return Chrysler to a much stronger relative position in the U.S. car market in order to be successful,” Mr. Feinberg continued. (This makes you wonder what Robert L. Nardelli, Home Depot’s former chief executive and $225 million man, does as chief executive of Chrysler.)

At one point, Mr. Feinberg says his firm’s “success does not depend on the future of GMAC, Chrysler, or any other single investment.”

Mr. Feinberg seems less indifferent — and more negative — about GMAC.

“GMAC is an investment about which we have significant concerns,” he wrote. “If the credit markets continue to decline and we find ourselves in a prolonged environment of capital market shutdown, GMAC could run into substantial difficulty.”

Despite all the unwanted attention, Mr. Feinberg is as sharp-elbowed as ever. He whined about ending up in court after Cerberus walked away from its deal to buy United Rentals.

“They hauled me and other Cerberus people into court, and prior to trial brought me to a deposition where they tried to pressure me by asking numerous personal questions that had nothing to do with the case,” he wrote. “We stuck to our guns, and the truth prevailed.”

To be sure, Mr. Feinberg, in his letter, was playing to his audience: his private investors, not the public. He tried to appear introspective and “disciplined,” which, on Wall Street, is code for ruthless. He even tried to humanize himself: “We need to remain vigilant, humble, hard-working, focused and disciplined. We cannot let up for one second.”

But set against everything else he said, those words rang hollow. Mr. Feinberg must have realized his letter backfired because by Friday, Cerberus was sending around a new statement to anyone who would listen.

“We continue to be extremely enthusiastic about our investment in Chrysler,” the statement said.

Trying to explain away Mr. Feinberg’s cheerless outlook on the economy, Cerberus said it “has an obligation to be forthright with our investors about all possible risks and uncertainties that could impact their investment.”

“Although we prepare for the worst-case scenario,” the company said, “it doesn’t mean that it will certainly happen: in fact, we are committed to doing everything in our control so that it doesn’t.”

Thanks for the assurance.

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