The Cerberus Mysteries Deepen
I don’t mean to alarm you. But I’m getting more and more worried about Cerberus’ role in the auto relief signed last Friday.
First, as plunger noted, Cerberus just suspended the ability of its investors to withdraw from its fund.
Cerberus Capital Management CBS.UL plans to pay 20 percent of year-end withdrawals in cash and suspend the remaining withdrawals for investors in its Cerberus Partners fund, television network CNBC said on Tuesday.
[snip]
We believe it is necessary to suspend withdrawals in part so as to [sic] to unduly increase the illiquidity of the fund for remaining investors and to permit the fund to take advantage of the buying opportunities currently available in this depressed market on a limited basis,
Now, since I’m not an investor in Cerberus, this doesn’t affect me directly. But I am rather troubled that Cerberus took this move just days after the Federal government loaned $4 billion to a Cerberus subsidiary without requiring that Cerberus reveal any of its financial data publicly. Turns out, we all only had to wait a few days to get a sense of their financial status … and it’s not good.
Then, there’s the continued, seemingly universal uncertainty about Cerberus’ role in the loans to Chrysler and GM.
Press reports are conflicted over the terms that Cerberus agreed to in return for the assistance. While the Wall Street Journal reported over the weekend that Cerberus had agreed to backstop the loan by having Chrysler’s financial services subsidiary pay the government its first $2 billion in earnings or dividends, the New York Times said that guarantee applied only if the subsidiary was sold.
It’s unclear whether Chrysler Financial is currently profitable or pays dividends, since Cerberus hasn’t publicly disclosed such information. Nor has Cerberus said whether Chrysler Financial or any of its assets are for sale. It has also not disclosed who potential buyers for the finance sub might be.
The terms of the government loan, as published on the Treasury Department’s website, specify that Cerberus could make taxpayers whole for losses of up to $2 billion on the facility. But those terms are prefaced with the phrase, “to the extent permissible under existing agreements.”
“What does that mean?” asked William Bratton, a law professor at Georgetown University, who added that the “vague” wording made it sound as if the agreement depended on waivers from Cerberus’ lenders. The identity of those lenders has also not been disclosed.
[snip]
In contrast, legislation that was passed by the House but failed in the Senate would have given the government the right to a $4 billion equity stake in Cerberus if Chrysler defaulted on the bridge loan.
Here are those terms (and here are the terms for GM). Note the due diligence TBD on the Chrysler terms. An even more troubling detail? They’re only giving Chrysler $4 billion, whereas GM gets two later payments. Yet Chrysler said it needed around $7 billion to survive. In other words, they don’t appear to intend to have Chrysler survive.
Meanwhile, I have been calling around to Congressional staffers and people are either gone for the holidays–as they should be–or unable to find anyone who knows the answers to my questions about Cerberus. Nobody–at least nobody in the Democratic caucus–appears to have a handle on this.
In any case, here’s my fear.
Bush–or rather, you and I–just loaned Chrysler $4 billion dollars. According to reports, the management of Chrysler–up to and possibly including Chrysler’s CEO Bob Nardelli–was not involved in negotiations over the loan. Instead, Cerberus oversaw those negotiations. Yet, Cerberus may not be on the hook for any of that loan. In fact, Cerberus is trying to sever ties with the actual recipient of the loan altogether.
I’m no financial whiz. But that seems like the equivalent of an evil step-parent negotiating but refusing to co-sign on a loan, ensuring that the loan won’t even pay for food and shelter, then abandoning its step-child on the side of the road with the loan as its sole protector.
And meanwhile, Cerberus has just told investors they can’t have their own money back–partly because it intends to "take advantage of the buying opportunities currently available in this depressed market."
I told you we should have nationalized Chrysler.
Thanks ew.
digg
Dan Quayle…I have been smeeling the rats con job with Ceberus owning 1/2 0f GMAC a hardball lender. Finance is where dealers make it. Need more daylight on this process as we need it on where the billions are going to the banks.
I have been smeeling = The process of rubbing butter into the skin of a new born baby badger. It is imperative this happens within the first 48 hours or it loses all flavour.
So the real Bush boys got away with theft during the S&L bailout and the adopted idiot son gets taken care of under this one?
WTF?
Idiot brother (Jeb) was hired at Lehman in August 2007.
Why do I get a sense of theft in plain site with those supposedly in charge of stopping the theft actually cheering from the bleachers as the thieves scamper off with the loot?
Teapot Dome.
Again.
And again.
And so on.
If Cerberus can’t cover withdrawals, it is effectively saying it is bankrupt. Illiquid nowadays means that they have a lot of crap they can’t unload even for pennies on the dollar. So if we could see into their books, it would probably show us that their assets don’t begin to cover what investors have invested with them. This screams insolvency. So you better believe that they don’t want anyone looking at those books.
shorter cerberus: “bend over” …
It’s hard to believe that Neil Bush isn’t part of Cerberus.
It’s his kind of
scamcompany.Gosh. That’s a good point.
Then again, everyone always figured Quayle was just another son figure to Poppy. With Quayle, who needs Neil?
BTW a fund manager who invested in Bernie Madoff’s Ponzi scheme committed suicide.
http://www.msnbc.msn.com/id/28368421/
This is sensational so it makes the news. The truth is that Madoff, Paulson, Rubin and so many, many others have done things that will cost the lives of far more Americans than were killed on 9/11, and ruin and damage the lives of millions. They belong in jail for the rest of their lives. Then with reform and sound business practices this wouldn’t happen again.
i don’t really understand how private equity firms like cerberus work so i probably have this all wrong.. but wikipedia says it’s a limited partnership. in this case doesn’t that mean that investors don’t and can’t expect liquidity?
shorter: we believe we won’t let people have their money back because we want to use that money.
There are usually arrangements where an investor has the right to withdraw after a specified time say 3 months after notification. It looks like Cerberus is functionally insolvent and is hoping to use whatever money it still has to double down and buy assets on which it hopes to recoup its losses.
thanks, i didn’t know about the 3 month (or similar) kind of notification period.
b
So… to turn the question on its side a bit… what is Cerberus wanting to buy exactly?
Time, so the managers can thourghly hide their gains takings in offshore accounts.
Sorry that should have been:
Time, so the managers can thourghly hide their
gainstakings in offshore accounts.Without wishing to dispute your amusingly cynical theory, I was referring specifically to this part:
Do they have a real estate play? Or do they plan to use the bailout money to pick up part of GM (or the supply chain companies?) and let Chrysler drown? Etc.
The Cereberus business plan involves acquisition to gain effective ownership control, ie over the divestiture that recovers both the investment and the return.
From no later than when Greenspan was appointed to head the Fed, the preferred tool to acquire ownership control has been leverage – very often private placements of preferred stock followed by leveraged buyouts of public stock. In the 1980s the orthodox view of leverage was along the lines of 10:1. The business plan was to acquire, strip, re-package and sell. The prototype was The Carlyle Fund. The protypical product was BAE out of the UK, which BAE UK broke down into pieces for sale, many of which then were acquired by Carlyle, stripped, re-packaged and eventually re-sold back to the shareholders of BAE UK as one entity but now as BAE US.
That business model, and with it the mythology of the 10:1, is now tres old school. Starting after the Bush 41 recession, the typical ratio, if discernible at all, kept going higher and higher, among other means by spreading the perceived risk over more and more corporate entities – typically comprised of Merchant Banks, Insurance Companies, Stock Brokerages, and the Fab Five Fs: Institutional Funds, Mutual Funds, Pension Funds, Hedge Funds, and Big Fraud.
That last “F” became so entrenched in industry expectations as to have its own number – but since its also typically a component of each identifiable entity involved in a given acquistion, it’s grossly misappreciated for having an arithmetically estimable effect, rather than for actualy having exponential effects, some of which are beyond the ability of anyone to discern with any effective clarity.
However, there are some in the finance industry who, having realized not just the existence but the essential characteristics of the Big F, sought out a vehicle to exploit it – and determined that Hedge Funds were best suited to it, in large part owing to their being unregulated. That status allows Hedge Funds to undertake action even in the context of regulated sectors. Such ‘positive’ action, however, is contrary to one of the main underlying ideas for NOT regulating hedge funds: that they function as essentially passive bets against corporate myopia and insanity.
Put another way, allowing Hedge Funds to act in regulated sectors to bring down the corporations the fates of which they have undertaken theoretically passive bets is pretty much the same as teaching vultures to hunt live healthy prey.
It brings to mind that classic cartoon that I think may have started in The New Yorker but has been re-produced so many places its origins by now could be consigned to doubt: Two vultures perched in a dead tree in a desert looking down on dried out, sun-blanched cattle skulls and bones, and one turns to the other and says: To hell with scavenging – I’m going to kill something.
Thus, the so-called Vulture Fund, the prototype being Cereberus – tellingly, headed by former GWB Treasury Secretary John [attaboy] Snow, and with its acquisitions financed repeatedly by entities owned or controlled by The Carlyle Group, itself closely identified with GHWB and James Baker III – and the prototypical new acquisition being one not just of the assets of a distressed corporation, but one whose distress has been exacerabated by Congress critters – and which gets aquired not just by leveraged capital, but by capital so diluted as to bring into question its very existence.
In this regard, it should be noted that in November a merchant bank called Boston Holdings that is in reality a subsidiary of The Carlyle Group approved a line of credit extending into the hundreds of millions to Cerberus as controlling owner of GMAC, in connection with US Treasury injecting some hundreds of millions of TARP monies into GMAC in the “financials” phase of the bailout.
It may be of further note that in 2003 The Carlyle Group was reported to have ’sold’ its hedge fund portfolio to “management”, called CAMG in the wake of some unpleasant experience from the hedge fund take down of Cordiant Communications Group – in which the vulture that ended up with that piece of meat was Cerberus. [I add to this that the vulture group the estimable then Congressional Committee Chair Jerry Lewis R-CA was helping out so symbiotically before the Dem mid-term victory in November 2006 was also Cerberus.]
There’s also the Dante’s definition from the Divine Comedy
Oh yea, and they wanted to buy Blackwater last Spring
Precisely.
Tail grows to 30x the size of the dog. So what wags what?
Tail then grows fangs.
Yummy 2 b a tail.
Cerberus is broke Goldman Sacs is next?
The suspension of withdrawals gives me a *VERY* strong impression that Cerberus is in immensely deep shit, since it essentially makes it impossible for them to raise further equity from investors. The stuff about ‘buying opportunities’ is marketing fluff — almost de rigeur, but everyone knows it’s BS. This suspension points strongly to one of the possible scenarios underlying Cerebus’s refusal to give Chrysler more cash — they simply don’t have it.
Anyone want to set a line on Cerebus declaring bankruptcy in the next twelve months?
I’m sure “bankruptcy” is not the correct term, and I don’t foresee the principles of Cerberus ever allowing their laundry to be aired in a Chapter 11 proceeding anyway.
How about “insolvency”, especially because that term strikes at the heart of a business plan that’s predicated on minimal-to-no capital investment to gain control of a dying carcass, to feed off for a while and otherwise leave to its backers to recoup off the carcass – with the compliant backers being the ones filing to get bailed out by TARP. I fail to see any other conclusion for a corporation that finds itself in the clutches of Cerberus.
It also does NOT mean those ‘compliant backers’ will take the TARP funds as a form of security to continue extending the line of credit – which after all would have gone to Cerberus, not the body it’s feeding off. One could almost see inventing Cerberus as a vehicle to ensure recovery through a government bail-out – which, despite the fact that one could not necessarily envision let alone the exact TARP process, is far from inconsistent with the Fed-and-Treasury pattern since the summer of 2007. Certainly any TARP funds that have been gone to entities over which Cerberus has been hanging must be presumed to have a Big F component – something that Rep Jim Bunning would know a lot more about than anyone here.
In Greek mythology, Cerberus was a monstrous three-headed hound which guarded the gates of Hell, preventing anyone there from escaping. That strikes me as an appropriate image for a vicious pack of curs intent on ravaging anyone unfortunate enough to be caught in their maws.
So the function of Cerberus the corporation may be to keep Chrysler in hell?
Well, here’s the way that I figure it and anyone is free to correct me.
I buy shares in Chrysler b/c I want predicatable, monthly finance $$ and after my buddies in ‘finance’ got ‘finance and credit card ‘reform” through the Congress, I can nail some sorry bastard for not making the $400/monthly payment on his Jeep, but I still have predictable revenue without having to ‘expose myself to risk’ by actually producing goods or services.
And buying stock in a company is a financially regulated activity, so I gotta play by the government’s rules.
But speaking of ‘exposing myself to risk‘, there’s a new financial ‘instrument’ called a Credit DEFAULT Swap. It insures my ‘investment’, only if the company in which I own shares collapses.
I can spend $1 to ‘leverage’ getting as much as $30 in return –if, and only if — the company (let’s say, ‘Chrysler’) goes bankrupt or goes under.
So imagine those two vultures sitting in that cartoon?
We’ve now given them 10′ long fangs, 30 foot powerful wings, and a mighty appetite for the kill. Because they have to fight off other big vultures, plus ‘the appetite grows with eating’, as Mr. Hitler once said.
Plus, the place that I buy those CDS swaps is NOT regulated.
It’s the ’shadow economy’; these guys flourish in the unregulated, out-of-visibility economic ecosystem.
A return on ‘investment’ in legitimate stocks takes years, and is not likely to pay $30:1.
But if you have enough ‘insurance’ in the form of CDS ’s, you stand to make quite a ‘killing’.
Also, if as ThingsComeUndone@22 points out, Goldman Sachs is in trouble, that’s even more interesting when you match it up with the notion that the government in Sept ‘forced’ the big banks to ALL take TARP $$ in other to hide the fact that Citi was in trouble.
What does that mean?
I’m not sure, but here’s the outtamyarse first guess:
Citi, like Goldman Sachs, sold ‘derivatives’ — including CDOs and CDSs.
As near as I can tell, Wells Fargo and the other big banks did NOT sell derivatives.
If you had someone coming to collect on CDS ‘bets’, which of the banks would be in the biggest trouble? The one that sold the biggest, baddest-ass CDOs and CDS’s, because IIRC Citi made fee-based revenue on those. The bigger the CDS sold, the bigger the fee is my guess. If that’s the case, Citi and GS thought they were Masters OfTehF*ckin’ Universe.
And they’d be in the biggest trouble.
Anyone want to tell me what I got wrong here…?
the government in Sept ‘forced’ the big banks to ALL take TARP $$ in
otherorder to hide the fact that Citi was in trouble.========
Blue@31 – Cerberus was helping drive the auto bailout, remember? Ford only went along ‘for the sake of the industry’.
Think of Chrysler as the ‘hidden entrance’ by which Cerberus is going to access TARP $$ to try and stay alive. It’s incentive must be to take down Chrysler Motors so that it – or some of it’s Private Equity buddies – can make a killing from CDS’s paying off after Chrysler’s financial obituary has been written.
Like in a play, where the wall that appears to be full of library books ends up actually being the entrance to a deep, hidden chamber? That’s how I think of Chrysler in this situation. They’re just the access point that Cerberus is using to get TARP $$ and stay alive.
A few threads back, you’ll find alank linked to an article stating that when Cerberus bought GMAC in Nov 2006, they ended up with something like $57 b-b-billion in toxic subprime debt. So they’re trying to spin that off of what they own, and they’re spinning it off to the UAW as near as I can figure out.
Again, anyone is free to correct my understandings.
FWIW: this is all exponential money.
If I buy a CDS at $1 for a $30 return if Chrysler goes under, that may not sound too dramatic. But run the numbers (remember your exponents from 9th grade?)
1 x 1 = 1
1 x 30 = 30
———-
1×1 = 1
But 30 x 30 = 900
———-
1 x 1 = 1
But we now have 900 x 30 = 27,000
——————————
Odd as this may seem, this might be a moment to mention ‘drosophila’, the lowly fruit fly whose study was maligned by Sarah Palin.
If you ever see graphs of fruit fly life cycles, they actually have this: 1 > 30 > 900 > 27,000 type of pattern. Actually, you begin with two (2): 1 male, 1 female. But the way that they lay eggs, and the way that the eggs all hatch over a period of hours and then you have thousands of hungry fruit flies, is probably a far better way to think of this CDO and CDS mess.
People think the whole stock market thing is linear.
As LabDancer points out, there’s a whole level of ‘derivative’ activity that is exponential.
I first took exponents seriously when I was stuck on a (mercifully short) little paper project on fruit fly population dynamics many years ago. I never imagined they might help me think about the stock market and economics, but there you have it… life being full of the unexpected, eh?
I minored in math. (insert smiley here.) But since there isn’t 27,000 x $X in the world, what happens really when Ceberus goes to collect on their CDS? Does Cerberus wind up owning Goldman, Citi, etc. ? And thereby controlling their other assets or something? Tryin’ to see motives here.
Well, as to that math major — better you than me!
The only kind of math I like is the kind I can draw ;-))
I’m also trying to sort out motive, although a bit blinded by the size of my tin foil hat, which seems to be sliding down over my eyes… (sigh).
For motive, I assumed that getting the money from the insurance claims on a ‘dead’ company was a more lucrative deal for a short term investor than waiting until retirement while holding the stock.
Since the stock price is uncertain, yet for each dollar on a high risk CDS you stand to get 30 back if/when the company tanks, you are hugely incentivizing destructive economic behavior that is more focused on extracting ‘capital’ from companies and leaving the carcasses behind.
I don’t know what happens when Cerberus goes to collect from Goldman.
Because I don’t know whether Goldman is solvent.
If it is, then I suppose they pay Cerberus.
If it isn’t…
Okay, time to reshape my tin foil hat…
A bridge loan too far.
The taxpayer billions for Chrysler may not be enough to allow Chrysler to reorganize. It may be just enough to allow Cerberus to make an orderly withdrawal from its investment in Chrysler. On the backs of Chrysler’s “management” (if any are left who don’t work primarily for the Big C), its workers, their states and communities, and the federal taxpayer. A Rovian wouldn’t do it any other way.
It’s not really a “loan” in the ordinary sense anyway. The terms are non-commercial; the debtor is knowingly unlikely to be able to repay any of it in the ordinary course. Larger commitments would need to be made in order to recoup even part of the “loaned” funds. This is an equity stake in a failing firm. What federal decisionmaking role comes along with the money? None?
I think they should have left Chrysler out of any bailout plans and focus only on GM and Ford.
Why can’t this entities that have very successful units, like Cerberus and AIG, sell off those units to raise cash. A know this guy is not popular on FDL but he makes the same point.
http://www.forbes.com/2008/12/…..stein.html
If the general public knew that entities that could raise cash on their own were getting the bailout, I think there would be more outrage.
what happens when ya figure in the 5bn or so the canadian gov’t said they were going to kick into the kitty for the auto-bridge loans ??
does that change the dynamic ??
Chrysler, like Montgomery Clift, has been committing the longest suicide in stage (or Detroit’s) history. Daimler originally intended to gobble it up ten years ago, then choked it up like a fur ball. It ought to be incorporated into a survivor from the Detroit melee, and the $4 billion may be intended to do that. But that’s taxpayers’ money that will either enrich Cerberus, or allow it to get out from under a doomed investment at lower cost, with a fraction of the accountability normal for the owner-manager who’s calling the shots. Nice work if you can get it.
I echo the refrain often heard here. Detroit is the core of America’s manufacturing resources, not just automotive ones. Management, labor, sites, equipment, manufacturing and assembly know-how, engineering designs, patents and trade secrets, multiple tiers of varying sophisticated suppliers. America loses big if these assets become owned by SAIC in Shanghai, China, or any other foreign owner.
All other countries, but especially China and Japan, integrate governmental and private business goals, to varying degrees and with rates of success). The US does that only to the extent it subsidizes its companies via tax and regulatory enforcement policies, and the granting of legal immunities for excessive and wrongful behavior. (Pollution and unsafe working conditions come to mind, as do low mileage requirements.) Unlike our foreign competitors, for the US government and taxpayer, it’s a one-way street. Benefits received stay with the private sector.
The $4 billion loan seems to be intended to secure Cerberus’ interests, not Chrysler’s. The funds allocated for Detroit seem intended to secure management’s interests, not labor’s or the companies, or any other constituencies’, like taxpayers’ or the communities heretofor dependent on these companies for their economic well-being. Let’s hope Obama is as smart as his reputation, and more progressive. A lot’s riding on his leadership.
roTl, a couple of things. CDSs operate on debt instruments, usually bonds, not stock. There is no reason to worry about the leverage issue with CDSs, you just buy as much as you want.
I think the issue with CDSs is we don’t know who benefits from the failure of the big 2.5, because no one knows who owns or sold protection. That means we don’t know the motivation of side players who are lobbying the issue.
Thanks very much — you continue to enlighten!
I suppose that part of what I’m wondering is — since there is zero transparency with respect to who owns the CDSs, couldn’t a party purchase the stock, thereby appearing quite legit.
But then take a side bet via the CDSs?
In other words, present a legitimate front as a stockholder, while ‘hedging’ bets out the back door via CDSs?
If stock is an apple, and a CDS is an orange, there’s more money to be made in oranges, as near as I can tell. At least, if you don’t care about financial sabotage, and you don’t care about long term economic health of a company.
I think these CDSs are profoundly destabilizing; from everything that I am able to read, they appear to incentivize ‘betting on a company to fail’. But I see now that they are not stock — more like an insurance policy, if I have it correct.
My gut reaction to the announcement last week about the bridge loan program was to consider buying GM stock. I wonder whether Cerberus, now having gotten a look at GM’s business plan through proxies in the Bush Administration, realizes it has a sure thing inside 3 months and is now hoarding cash to buy shares of GM…could they may be looking to sell Chrysler while buying GM stock without much disclosure (perhaps through a fund or two), press GM to buy Chrysler as a block shareholder and get Chrysler off the books while appreciated likely return on GM stock?
Or does Cerberus hold GM bonds and is now trying to figure out how to take a loss on some portion, now that the UAW won’t make any further concessions without bondholders also taking a haircut?
There’s got to be a reason for Nardelli being partitioned, a firewall of sorts. Is there some reason why Nardelli might be obligated to report publicly on transactions that Cerberus doesn’t want to deal with?
These are the dynamics that I was trying to suss out, but you’ve synthesized and articulated them better than I did.
Looks to me like a magician’s trick: “see this hat…?”
They’ve got a rabbit hidden somewhere, and they’re trying to get more rabbits via the bailout, it sure seems to me.
Can anyone tell me why GMAC is advertising house loans and car loans like crazy in our market? Is it happening any where else? Where are they getting the money to run these ads…lots of them. Seriously. We, at my house are very sensitive to the whole “GMAC” company logo and have been utterly astounded. Those ads cost a lot of money right? Where? Why? If they are that close to bankruptcy and if the finance end is in trouble how are they loaning anything??
Does anyone have a good business reason for this?
Also…could cerberus really have ties to Saudi oil, is it completely impossible that the republican business men have been duped by a group of savy Saudi business men (or terrorist from other parts of the world) and have been manipulated into this place? Is it at all possible that this has been part of an economic terrorist plan and the republicans are getting paid (as they are wont to do) but are sacrificing our economy?
Straighten me out…I am not good at details..but given the way that homecomings completely refused to follow the law, the way that buscho actually paved the way for this, the way that those repugs have run the war, the way that this whole bail out is shrouded in secrecy…the world market (one of the disadvantages of which is that it’s very hard to know who owns and runs what and especially so of something like a hedge fund company???).
Am I crazy or could this have been part of the design…to manipulate greed in America in such a way as to destroy it? Okay, having said that sentence…I realize we probably didn’t need any help.
I’m no expert, but I think its a mix of greed and stupidity and arrogance.
Some of these guys thought they understood the markets, but they don’t. So that aspect is the Emperor’s New Clothes level of what’s happening, where only us blog readers have the childish naivete and raw anger to say, “WTF?!! How come these idiots are bare-ass naked?!”
But I also suspect there’s a great deal of criminal activity in all this; in the Information Age, power is/was knowledge. But the structures of secrecy and opacity — combined with arrogance and levels of privatization — appear tailor-made for fraud to remain hidden.
I think of it as a new form of economic parasitism that we’ve not seen before.
As for the GOP (and many Dems) being duped, that’s kind of a slam-dunk in view of what we see playing out. I don’t even think they needed to be paid off in a lot of cases, they just needed to have their vanity flattered. Sad.
I’m thinking maybe GM is just using the bailout opportunity to get rid of a competitor. See my #11 on the George Bush Spent $4 Billion to Kill Chrysler on Obama’s Watch thread. Also maybe Cerberus has CDS’s on Chrysler and that’s how they’re making their money on the thing.
Cerebus was buying around the world in 2005. “What’s bigger than Cisco, Coke, and McDonalds”? Answer: the hedgefund Cerebus
http://www.businessweek.com/ma…..953110.htm