A giant stumbles, loses money, and gets a financial bloody nose.
For Stephen A. Feinberg, the long road back from the most disastrous investment of his career — Chrysler L.L.C. — began last week around a polished wood table inside the Treasury Department. It was not the road he had envisioned when his private investment firm, Cerberus Capital Management, bought Chrysler in the summer of 2007.
O, yes, in 2007 things looked good. Really good. As it turns out, that was the very top of the stock market's ride.
Back then, Mr. Feinberg was hailed as a hero — the Wall Street financier who just might save the American car industry. Instead, he lost billions for his investors and co-investors. And last week it became clear that he would lose Chrysler’s auto operations, as well.
Cerberus is one of the big financial players.
So as the Obama administration prepared to assert control over Chrysler and General Motors, Mr. Feinberg flew to Washington to try to salvage what he could. In a midweek meeting with Treasury officials, Mr. Feinberg agreed to give up the 80.1 percent stake in Chrysler held by Cerberus and its co-investors, according to a person briefed on the negotiations. He first offered to do this last year.
Billions of investment dollars gone poof!
But Mr. Feinberg did not go quietly. He also discussed additional federal money to help his other wayward investments in Detroit: GMAC and Chrysler Financial. Cerberus is now pushing the government to help orchestrate a merger of the two auto financing companies — a move that might eventually yield a profit for Cerberus.
GMAC is now a bank. Imagine that: Chrysler Bank.
Whether the Obama administration will oblige is unclear. But this much is certain: Cerberus, long considered one of the most formidable investment firms on Wall Street and in Washington, stumbled badly in Detroit. It is now struggling to rescue not only what it can of its investments — about $3 billion in Chrysler and the two finance companies — but also its reputation. Cerberus persuaded others on Wall Street to invest billions more.
But the loss is bigger, wider than that.
Cerberus, many agree, was like so many private equity firms that overreached during the late boom in corporate buyouts. But the firm also seems to have miscalculated in Washington. Mr. Feinberg employs a Who’s Who of Washington insiders, among them John W. Snow, the former Treasury secretary, and Dan Quayle, a former vice president. Cerberus has lobbied aggressively in recent months to shape the government’s rescue of the auto industry, to little avail.
I wonder how many people Dan Quayle (or is that Quayl? — get it?) lobbies, and how many don't laugh.
But Cerberus, like many private equity firms, loaded its new ward with what turned out to be crippling amounts of debt. Cerberus piled about $20 billion of debt onto Chrysler, Mr. Gabbert said. As car sales plunged across the industry — and, in particular, at Chrysler — the carmaker began to buckle under its load.
That is a huge debt load.
Cerberus began losing its control over its Detroit investments when the government stepped in to rescue the automakers last year. In the case of GMAC, the government invested money in December and required that most of Cerberus’s operations team be removed. But some co-investors said that made sense because at that time, the government became the majority owner of GMAC.
Cerberus’s investors in the Chrysler deal include pension funds for public employees in Indiana and for public school employees in Pennsylvania, according to PitchBook.