Chrysler LLC announced Wednesday that it's shutting down its auto plants for a month, blaming the stoppage on tight consumer credit and its own dwindling cash reserves. The Bush administration continues to work on a multibillion dollar rescue package for the auto industry, after Congress failed to pass bailout legislation last week.
Chrysler has said it urgently needs $7 billion in federal loans to keep going. But at the same time, its owner, a powerful private-equity firm called Cerberus Capital Management, was pushing a different agenda.
The diverging interests between Chrysler and Cerberus are rooted in the 2007 deal that brought them together. Cerberus bought Chrysler from German manufacturer Daimler Benz, which had lost billions in an unsuccessful transatlantic partnership.
Tracing The History Of Chrysler And Cerberus
In July 2007, Cerberus chairman John Snow spoke to the National Press Club. He posed the question on everyone's minds: "How can you make a success of Chrysler? Well, we're investing in Chrysler because we're confident we can make a success of it."
Snow had just recently joined Cerberus, after a three-year stint as Treasury secretary in the Bush administration. Under his leadership, Cerberus proceeded to change Chrysler's management, make cutbacks and strip down the product line.
As a private equity firm, Cerberus raises money to invest without selling stocks or bonds, and without operating under securities regulations, as General Motors and Ford Motor Co. do. But this fall, when Chrysler came to Washington with a tin cup, critics noted that the amount it was seeking almost matched the $7.4 billion purchase price for the company in 2007.
This raises the question: Is Cerberus just looking to recoup its investment before it dumps Chrysler, too? This month on Capitol Hill, Chrysler executives insisted that wasn't the case, but many lawmakers didn't believe them. At a hearing of the Senate Banking Committee, Sen. Bob Corker (R-TN) said he had spoken with someone on the Cerberus board, and "what the board member said to me is that there's no way they would make additional investments in the automobile industry at this time."
When asked by NPR if the firm would commit more money to Chrysler, a spokesman for Cerberus didn't answer directly, but cited its "fiduciary responsibility" to seek the best return on investors' money.
Cerberus' Connections Within Congress
The bailout bill that failed in Congress would have lent federal dollars to Chrysler and GM. It also would have given financial oversight powers to three federal watchdogs: the Government Accountability Office, a special inspector general at the Treasury Department and the so-called "car czar" who would oversee the rescue program. Cerberus wanted all of that oversight targeted on Chrysler, not itself, arguing that as a private-equity firm, its own financial data should not be subject to scrutiny.
Cerberus essentially lost that fight — and deserved to, according to Art Wilmarth, professor of corporate law at the George Washington University law school.
"It seems to me," he said, "once you come to the public trough, then you have to put aside whatever secrecy you might have enjoyed when you were an entirely private company."
An even more critical issue in the congressional negotiations was the question of a loan default. If Chrysler defaulted on a federal loan, Cerberus didn't want to be on the hook. Many in Congress thought it should be.
Congressional aides told NPR that White House staff and Chrysler lobbyists were negotiating with Congress, while Cerberus executives did not engage in direct lobbying on Capitol Hill until near the end of the process. Cerberus has strong Republican and White House connections. Not only is former Treasury Secretary Snow the firm's chairman, but Snow's general counsel and chief of staff who served with him at Treasury lobby for Cerberus. Another lobbyist is former Republican Sen. Dan Coats. Former vice president Dan Quayle is a principal at Cerberus.
Despite Cerberus' efforts, lawmakers of both parties responded to a more populist argument. Sen. Tom Coburn (R-OK) told reporters that taxpayers shouldn't be asked to pay for Cerberus' mistakes.
"There's not anybody out that is working a 9-to-5 or an 8-to-4 job that is going to say, 'Yeah, we ought to do that,' " he said. "Cerberus Capital has to experience some pain."
Yet Kim Korth, president of the auto industry consulting firm IRN Inc., says that Cerberus benefits from getting thrown into the same leaky boat with GM and its huge work force, and with thousands of industry suppliers.
"A harder deal might have been struck if there wasn't the sense of urgency that exists right now" at General Motors and down the supply chain, she said in an interview. Lawmakers "are not going to require the level of scrutiny they might have, or the level of co-commitment from Cerberus that they would have otherwise done."
Cerberus declined NPR's request for an interview. It provided a written statement that made two main points: First, that the private-equity firm "stepped up to the plate" to help the industry and Chrysler; and second, that much of the money to buy Chrysler was invested by pension and retirement plans, making those shareholders no different from GM's or Ford's.
The Cerberus statement didn't mention the rescue package, or the firm's plans for Chrysler.