A Benevolent Cerberus, Coming to Chrysler's Aid?

Bloomberg is reporting that Cerberus has agreed to forego any profits on its Chrysler investment if the U.S. government were to provide aid to the ailing auto manufacturer (see Cerberus would Cede Profit).

I have been among those who have questioned the logic of providing U.S. taxpayer money to bail out Chrysler, and by extension, Cerberus (see Preventing Moral Hazard and More GM and Chrysler Shenanigans).

Now while it is oh so very generous (note the sarcasm) of Cerberus to offer up this concession, there remain several unresolved issues:

1. If Cerberus is not to gain on any eventual sale of Chrysler, does it also expect not to lose? Does it expect to recoup its $7.4B investment?
2. Does forfeiting profit on the sale of Chrysler also imply forfeiting future operating profit should the bailout work? That is, does Cerberus deserve to be able to earn income (and pay itself dividends) should Chrysler eventually become profitable?
3. Since it’s almost a certainty that Chrysler would go bankrupt without government backing (see Is the End Nigh for Chrysler), is Cerberus’s new found religion really just a manifestation of its incentive to hedge potential losses?

In my opinion, any investment that the U.S. government makes in Chrysler should include a “severe” penalty for Cerberus. After all, why should Cerberus expect to receive anything more than one penny of return on its $7.4B investment in Chrysler? And since Cerberus would lose all of its investment in Chrysler in the event of bankruptcy, the government could just happily wait for Chrysler to go belly up and then immediately step in to pick up the scraps.

So c’mon, who does Cerberus think it is kidding? While the offer appears benevolent, the motivation is all too transparent, and a little disturbing.

Disclosure: No positions.

Comments

[ronnieamyot:]

The UAW refused to work for the same cost of $48. per hour as the other auto workers in the USA. So now they will not only bankrupt their own companies but maybe the USA as well, which does not have enough cash to bail out a lemonaid stand.

2008 Dec 12 07:40 AM