Argument #1 for SOC: Bailing out Cerberus and the US Auto Industry

While I am early in forming the details of how the Stabilization Oversight Council (SOC) would operate, its principles are clear:

  • The best ideas from the best thinkers, operating in an independent, de-politicized structure, with
  • The discipline to make decisions that are objective, rational and without political bias, that incorporate
  • The best interests of its investor – the US taxpayer – while prioritizing the interests of other key stakeholders, and
  • The power to implement these decisions, the reasons and mechanisms for which are transparent and clearly communicated to the US public and interested parties across the globe.

This approach is specifically designed to blunt the influence of special interests, lobbyists, personal relationships and conflicts, real and perceived. In short, the SOC should be considered “smart money,” not the “dumb money” policies that have pervaded the Treasury-driven bailout programs thus far. A rational investor never would have accepted the terms of the Citigroup deal. This was an outright transfer of value from the US taxpayer to the Citigroup stockholder, and enabled entrenched management to become even more secure in its position. While the bailout of several of our largest financial institutions have been rife with conflict and undue political influence, my hope was that Congress and the Administration would learn from its mistakes and not repeat them with the auto industry. Unfortunately, it appears that my hopes were unrealistic. Because if temporary steps are taken to bridge the auto industry until early 2009, without an appropriate restructuring of the businesses which are, for all intents and purposes, bankrupt, then one of the largest buyout firms on the planet will be (at least temporarily) bailed out with taxpayer money. The fund in question? Cerberus.

Make no mistake, Cerberus has friends in high places, and is throwing around its influence (and its cash) in order to protect its ~$2 billion investment in Chrysler and GMAC. According to the New York Times, Cerberus has spent $2 million of its own money this year lobbying on behalf of its auto interests while Chrysler itself has ponied up $5 million to play the influence game. Given that the industry can’t pay its bills, this money by spent by them to get more money out of us that is essentially paid for – by us. This simply doesn’t compute. Further, they have the nerve to intimate that their actions, which do not include putting in more cash to support Chrysler, are for the benefit of the employees and their investors:

Mark A. Neporent, the chief operating officer of Cerberus, said his company was focused on doing what was best for Chrysler and its employees, as well as for its own investors. Cerberus has pledged to forgo any fees that it might have collected on its Chrysler and GMAC investments if Chrysler receives money from the government, he said.

“We’re not in this for the money,” Mr. Neporent said in an interview earlier this week.

Then I guess their reputation with their Limited Partners isn’t about money, right? Cerberus’s official position is so transparently self-serving as to border on inane. However, their operating assumption is that US taxpayer money is dumb money, and the way things seem to be going they appear to be right. Some in Congress appear to be onto this, however, as noted in today’s Wall Street Journal:

Chrysler’s efforts have been complicated by increasing congressional scrutiny about why its majority owner, Cerberus Capital Management LP, doesn’t help the auto maker. Mr. 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.

But some on Capitol Hill believe Chrysler and Cerberus want short-term financing to buy time before selling the auto maker or merging it with another company. GM and Chrysler held merger talks this fall before the industry’s condition worsened. If Cerberus “will not put forth any more money to stave off bankruptcy, how could we in all good conscience expect taxpayers to take on this substantial cost?” asked Rep. Ginny Brown-Waite (R., Fla.).

Representative Brown-Waite asks an excellent question. How could Congress expect (the US taxpayer) to foot the bill if Cerberus itself isn’t willing to pay-to-play? Answer: it’s can’t. And if it does, it is not representing its constituents best interests. Let’s be clear: Detroit is bankrupt. It has been for quite some time, but the decades-long game of raising money, having a few good product cycles and delaying fundamental restructuring is finally over. There are no more “Hail Mary” passes to be caught; the embedded burdens of legacy pension and health care costs are simply too great, and the lack of adequate innovation and investment around fuel-efficient vehicles and technologies has doomed its product lines for a generation. Tossing more money into the auto industry without forcing a wholesale restructuring (that deals with the unmanageable costs and spurs innovation) is akin to handing Citigroup $25 billion without requiring transparency in its financial reporting (this was done already, of course). It is money that is simply wasted, fund that could retrain, retool, and educate hundreds of thousands of workers who would otherwise be displaced by an entire industry’s failure. But this is not the discipline with which our various rescue programs have been implemented, to the peril of both the US taxpayer and employees of companies that are the “walking dead.”

If the SOC were in place, Cerberus would be in the position of TPG with respect to its WaMu investment: busted. Stockholders and many debt-holders of the Big Three would be wiped out in an industry restructuring. Costs would be slashed. Health care and pension plans restructured. The emphasis would be on the workers, getting them prepared for new jobs in growing industries, and employing a portion of them in essential infrastructure projects to build US competitiveness. Existing assets would be sold, re-purposed, and re-used in a slimmed-down US auto industry that is focused on and motivated to bring new, fuel efficient cars to the global marketplace. It would leverage the tens of billions of dollars in venture-backed R&D that has gone into cleantech, and develop strong working relationships with the technology transfer areas of leading research institutions focused on green automotive technologies. And the US taxpayer would fund this transformation with an expected return on investment that an arms-length, “smart money” investor would require. This is a high-risk, growth capital play. Anything less is subsidizing those who don’t deserve it and shortchanging our citizens. And this cannot happen.

Will this be a painful transformation for a century-old industry that is one of our largest? Absolutely. But if we don’t face into these problems right now, the auto industry will go the way of Social Security: bankrupt, with problems compounding at an exponential rate without any hope of a solution. Will Congress on its own make these types of gut-wrenching decisions? No way. But the future of our children and our country depends on it.

About Roger Ehrenberg 94 Articles

Roger is an active early-stage investor, having seeded or invested in over 20 companies in asset management, financial technology and digital media since 2004. Prior to his venture days Roger spent 18 years on Wall Street in M&A, Derivatives and proprietary trading.

Throughout his career he has held numerous executive positions, including:

President and CEO of DB Advisors LLC, a wholly-owned subsidiary of Deutsche Bank AG. His 130-person team managed over $6 billion in capital through a twenty-strategy hedge fund platform with offices in New York, London and Hong Kong.

Managing Director and Co-head of Deutsche Bank’s Global Strategic Equity Transactions Group. In 2000, his team won Institutional Investor magazine’s “Derivatives Deal of the Year” award.

As an Investment Banker and Managing Director at Citibank, he held a variety of roles and responsibilities in the Global Derivatives, Capital Markets, Mergers & Acquisitions and Capital Structuring groups.

Roger sits on the Boards of BlogTalkRadio; Buddy Media; Clear Asset Management; Global Bay Mobile Technologies and Monitor110. He is currently Managing Partner of IA Capital Partners, LLC.

He holds an MBA in Finance, Accounting and Management from Columbia Business School and a BBA in Finance, Economics and Organizational Psychology from the University of Michigan.

Visit: Information Arbitrage

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