Crossing the River Styx: Cerberus Makes the Government Pay for Its Mistakes

According to Wikipedia.com, "Cerberus is a multi-headed dog which guards the gates of Hades (hell) to prevent those who have crossed the river Styx from ever escaping. " It is with irony that Cerberus Capital Group has managed to ensnare the U.S. government by capitalizing on non-performing acquisitions prior to the decline of GMAC and Chrysler. On October 11, 2008, I told you of the strategy that would be employed by Cerberus Capital in order to fleece the American taxpayer. Never in all my analysis did I anticipate the extent to which Cerberus Capital would succeed at robbing the taxpayer.

Remember, Cereberus Capital paid the tidy sum of $7.4 billion dollars for GM's GMAC financing division in a joint venture with Citigroup and Azora Capital to control 51% in April of 2006. Once the transaction was completed, Cerberus flipped a portion of the equity to the investors in their managed accounts. By doing so, Cerberus used their clients money to buy worthless "assets" in the hopes that something would materialize down the road. If the gamble had paid off then Cerberus would take the credit and keep some of the profits. If it failed then the problem would be on the shoulders of the investors of their fund.

Well, the gamble didn't pay off in the expected manner. As GMAC slid into oblivion, Cerberus Capital applied for a banking charter on November 20, 2008. This would allow the Federal Reserve to repurchase the bad debts on the balance sheet of the new GMAC bank and allow Cerberus to eligible for TARP funds. Cerberus was "forced" to give up some control of the bank in exchange for becoming a bank, no matter since Cerberus dumped the shares on the investors of their funds.

For a $7.4 billion dollar purchase, Cerberus made out like a bandit. All the backing by the Fed and access to the TARP funds allowed Cerberus Capital to walk away literally unscathed. Consider this, with FDIC insurance as a bank, GMAC was now a responsibility of the government. With active purchases of toxic debt by the Federal Reserve, a non-government entity, all responsibility associated with the risks of GMAC Capital were being cleaned up for Cerberus. Finally, access to the TARP would be the "profitable" portion of the transaction to buying GMAC.

As for the automotive holdings of Cerberus Capital, this much is clear, in September 2008 both Chrysler, along with GM, shared $25 billion, given by Congress, to "help" the auto companies avoid bankruptcy. Then in December, the executive branch of the government gave another $17.4 billion to bailout Chrysler and GM. Keep in mind that Cerberus paid $7.4 billion for Chrysler Group. If Cerberus had to split the $42.4 billion with GM then it is conceivable that Cerberus got at least $21.2 billion to rectify the problems at GM. Is it possible that some of that money didn't go where it was should have?

I am not surprised at the outcome leading up to the failure of Chrysler. I am only shocked at the thoroughness of Cerberus Capital to suck the government completely dry. As I said in my Oct. 11th posting, "the process of bankruptcy or merging with GM would be the final step in fleecing the taxpayer." It looks like Cerberus is fulfilling its duty by not letting us escape from hell on this one.

Comments

[Buy and Hol...:]

Did Cerberus get any of the money that was given to Chrysler at all? If not, then they lost out, but they're also responsible for larding up the company with so much debt that it was doomed.

Cerberus and the rest of the companies like it have taken a bath lately, as well they should have. If you look at companies that have failed and who have entered chapter 11 of late, a lot of them were taken private by companies like Cerberus.

May 28 03:56 PM

[ariel1939:]

Everyone understands and most disapprove of people who buy house cheap, paint it and resell at a price much higher than its worth. We call it "flipping". When a group of "investors" buy a company, empty it's coffers, fire half the employees, and resells it with a heavy debt load, it is known as reorganizing to improve efficiency. I call it "flipping."

May 28 07:32 PM

[john s. gordon:]

cerberus - some parasites do a more thorough job than others.
> jack

May 29 09:16 AM

[Oh No:]

The Cerberus guys have certainly been adept at accessing taxpayer capital to keep GMAC afloat but I haven't seen anything that shows they are making money (though I guess that since a GMAC bankruptcy has been prevented to date there is good value creation for Cerberus). On the contrary, if Aozora's earnings are any indication of the value of their GMAC investment, it's not going too well.

May 29 10:10 AM