Not a Good Sign: Cerberus Reopens Talks to Merge Chrysler With GM

There had been rumors that Treasury would unveil a rescue plan for the Big Three on Wednesday. The day came and went with no announcement.

Tonight we learn, via the Wall Street Journal, that Cerberus has revived merger talks for Chrysler with GM. The possibility of a deal would seem to complicate vastly an attempt to craft a rescue package (if Paulson & Co. was close to a deal for each of the Detroit automakers, the spanner-in-the-works of a pending transaction would force the powers that be to rethink how what the offered for GM and Chrysler separately would change if they were combined. It introduces an element of delay for two companies that have said they need a cash infusion in very short order.

That in turn suggests either that the discussions with the Treasury are not going well (at least from the GM/Cerberus point of view) and/or they are going too slowly relative to the urgency of their financial needs, and they are being forced to consider desperate measures. (Note that the New York Times has a “parties are deep in discussions” article up, saying that the government hopes to announce a deal by Christmas and indicating that Treasury is doing extensive due diligence on the companies’ books and plans to come up with something more comprehensive than giving a lifeline just big enough to tide them over to the Obama administration. No wonder the carmakers are nervous).

Another element that is distressing is that the media is increasingly taking up the theme that a Chapter 11 filing is the only way to restructure existing arrangements (too many focus on the UAW, when the bloated dealer networks are a bigger issue). But as The Deal pointed out in a lengthy discussion of what a Chapter 11 for GM would look like, a prepack is impossible given the number of involved parties. Worse, the process was likely to extend till late 2010. Consumer surveys have found that as many as 80% of prospective car buyers would be leery of purchasing a car from a manufacturer in Chapter 11. Short of Pinto-like exploding fuel tanks, a protracted process that is regularly in the papers is the worst sort of PR the carmakers could have.

Nevertheless, popular opinion seems to be moving to BK as the only way to get out of existing arrangements. The parallels to Lehman are scary. Outcomes are being driven by sentiment, not by analysis. Treasury and the Fed knew Lehman was on the ropes, yet made no serious effort to understand the possible impact of a Lehman failure. They should have been all over Lehman after its near-death experience when Bear went under, but instead sat on their hands.

With Lehman, the big unknown that should have been investigated was the true state of its balance sheet. With the Big Three, the wild card is how consumers would react. No matter how great theoretical advantages of Chapter 11 are, if a large proportion of customers abandon the company due to worries about its future, there is nothing to save. The Chapter 11 will morph into a liquidation as expected cashflows during the Chapter 11 process fall vastly short of anticipated levels. Assessing likely consumer reaction is far easier and less fraught than subjecting Lehman to serious examination would have been (there was a real risk that it could have fed concerns about the firm and accelerated its demise).

But as with Lehman, the public is developing bailout fatigue, and the carmaker’s failings seem more obvious than those of the financial industry, and therefore less deserving of forbearance.

AIG’s loans so far come to $1.4 million per employee, and many of whom are stationed overseas. But their requests for more cash and better terms got speedy approval, while the auto industry, on whom far more jobs depend, may be dealt a deadly blow due to the failure to due a basic investigation of likely consequences.

From the Wall Street Journal:

General Motors Corp. and Chrysler LLC have reopened merger talks, as Chrysler owner Cerberus Capital Management LP has signaled its willingness to give away part of its ownership in the auto maker, say people familiar with the discussions.

With cash running low at both companies, Cerberus took the initiative to restart discussions that sputtered just weeks ago. At that time, both GM and Chrysler viewed a business combination as impractical and as a distraction from their mounting liquidity problems.

Yves here. The fact that Cerberus may signal Washington backlash against bailing out a hedge fund with ample financial resources (although no doubt its funds have limits on what percentage of fund assets can be invested in any single transaction). Indeed, in the Congressional hearings on the rescue, Chrysler CEO Bob Nardelli revealed that the Treasury had not responded to its TARP request.

But for GM to agree to talk, as opposed to rebuff the approach, says they are worried that the government might not come back with a workable deal soon enough. Or perhaps more simply, that they have had so little in the way of substantive discussions (which they would expect if things were progressing) that they are starting to panic, particularly given this comment in the New York Times story:

In recent days, however, administration officials and company executives have sequestered themselves, offering only the slightest hints of what they are discussing, as market analysts speculate about how long G.M. and Chrysler can survive without a government lifeline.

Back to the Journal:

The renewal of the talks could be a way for Cerberus to show Washington — which is weighing a $14 billion rescue package for the auto industry — that it wants to cooperate in restructuring the industry, say people familiar with the buyout firm’s thinking. And it could offer the firm a way to protect its stakes in two distressed auto-finance companies, GMAC LLC and Chrysler Financial, which are crucial to the survival of the Detroit auto makers….

Yves here. Please. Cerberus already offered to give up all the upside in Chrysler in return for a rescue. This has the smell that it impasse is that the Treasury wants Cerberus to cough up more dough in connection with any deal, and Cerberus is scrambling to find any other option. Back to the story, which sets forth the impasse:

Earlier this month, Congress pressed Cerberus to inject fresh capital into Chrysler as part of any rescue plan. So far, the firm has rejected the idea, saying shareholders of rivals GM and Ford Motor Co. aren’t being asked to contribute more capital, and that its investment charter prohibits such a move.

One way in which Cerberus might make concessions, however, could be to give away some of its principals’ stakes in Chrysler as part of a broader restructuring. That could mean giving a future government auto czar discretion to distribute Cerberus’ stake to the United Auto Workers union or even to GM.

Cerberus’s equity in Chrysler has already been valued at zero by Daimler AG, which still owns 19.9% of the auto maker. But Cerberus hopes lawmakers would view such a move as a contribution to the restructuring of the troubled industry, says a person familiar with its thinking….

Layered on top of these complex discussions is the fate of GM’s former finance unit, GMAC, in which Cerberus holds a majority stake. It also controls Chrysler’s Chrysler Financial unit. Part of Cerberus’s strategy, say people briefed on the matter, is to protect its majority investments in these two units.

So we have tough guy negotiators (Cerberus is notoriously, even by private equity standards, greedy and hard headed) possibly holding up the rescue by refusing to offer concessions and muddying the waters by reopening talks with GM (although it does take two to tango).

A final tidbit:

One developing problem in the auto makers’ pursuit of government rescue funds is the state of Chrysler’s collateral. Unlike GM, which has assets it can pledge or use as collateral for a federal loan, Cerberus is believed to have pledged all of Chrysler’s assets in the summer of 2007 as security for $10 billion in bank debt.

GM, by contrast, could pledge its substantial operations in Europe, China and elsewhere, along with trademarks. An analysis by J.P. Morgan Chase & Co. this summer estimated those assets could raise $6 billion to $9 billion for the company. That could make the government feel more secure in lending money to the auto maker.

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  1. Anonymous

    This question is not exactly germane to the exact issue at hand, but…
    just out of curiosity, how many members of the auto supply chain also make parts for the military, and how would this be impacted by any implosion of the Big 3??

  2. Anonymous

    From Soot and Ashes (link):
    Should the US taxpayer bail out Starbucks?
    They’ve got 176,000 employees. They have 8,500 stores. They’re an integral part of American life.

    realtors and small businesses depend on them. And they sell an addictive product.

    Sure, they became arrogant. Sure, they paid their employees too much. Sure, they overbuilt crappy sterile soulless locations.

    But shouldn’t they be bailed out too? After all, their failure would be CATASTROPHIC! It would be the end of America as you knew it. Starbucks is at the very fabric of American life.

    How about $500 billion in loans, to build 100,000 new stores, update their furniture, and maybe a $100 direct tax incentive to help cash-strapped over-indebted Americans buy their coffee?

    Or hell, maybe free coffee for a year for everyone?

    Bail out Starbucks! It’s too big to fail!

  3. baychev

    i dont think consumer loyalty is a big problem for the US automakers. most of their sales are pickup trucks and those are being purchased by a distinct consumer group: militant, gun loving, football loving personalities. it is unimaginable to send the same message driving a toyota. just ask yourself: how many of the trucks do not have ‘support the troops’ sticker on the tail.

  4. bg

    The government has to play hardball. With the financials, the government has the power to shut off funding, and thus holds the ultimate upper hand. With the car companies (and UAW, and dealer network and bond holders) the only credible threat is BK. If paulson rolls, we will regret it in a decade. If he doesn’t roll, we risk a BK.

    I still remain unconvinced that the proper government guarantees wouldn’t keep customers buying US cars in a BK. It is another option for Paulson. (FDIC – federal deposit insurance for cars)

  5. Yves Smith


    “Trucks” includes SUVs, and those drivers are not (for the most part) rabid gun-totin’ types. GM in fact was trying to get away from them and planned to roll out 14 new passenger cars and crossovers by year end 2009 before the crisis hit.

    You are arguing from personal opinion re buyer reaction. You may be right, but the only survey done that I have seen on this topic concludes otherwise. And my point is a simple one: this is a central issue as to whether a BK will work or lead to liquidation, which everyone agrees is the worst possible outcome. It is not hard or time consuming to analyze. It is simply inexcusable that no one is trying to get a grip on this.

  6. Domino

    Two things that I don’t understand:

    1. Why would the Detroit-3 look any worse to consumers in chapter eleven than they already look being in such dire straights and asking for a bailout?

    2. Where did this idea that a GM-Chrysler merger was a good idea come from? I understand that Chrysler lacks the international presence to survive on their own in the long run and that other manufacturers don’t want to get involved in a merger during the recession but GM isn’t the answer. GM and Chrysler overlap on every product except for Jeep. GM already has too many brands. Does such a merger make sense? Am I missing something or is Cerberus just doing what it can to dump a bad investment?

  7. SpaceFury

    Given Cerberus’ involvement… how about this idea? Pledge GM assets to give them a lifeline for 6 months or so. Meanwhile, let Chrysler fail, go Chapter 11, and see how consumers _actually_ react. Then use that knowledge to decide what to do about (the much larger) GM, and maybe use Chrysler’s example as a credible threat to extract concessions. That way, no bailout of Cerberus either. And maybe also set the example to banks and other sectors that the gov’t can’t and won’t bailout everyone. Such expectations have only prolonged companies from taking swift action to ensure their survival.

  8. Domino

    Not everyone who drives a GM or Dodge fits into your categorization; at the very least the 100,000 people buying a Chevrolet Impala or the 73,000 who bought a Ford Focus last year do not fit your description (source). I’ll grant you that the large trucks made of the bulk of Detroit sales but they did so out of necessity as argued by Peter Brown. The Ford F150 was not the best selling car/truck solely because of one distinct consumer group as you suggest. Even if you ignore truck sales and focus only on cars the Detroit-3 still sale a lot of cars that don’t fit into your distinct group even if they don’t fall into the top five; consider this post from Megan McArdle for additional numbers.
    Consumer loyalty aside, Detroit needs to attract new customers in addition to retaining their current customer base if they are going to survive.

  9. Anonymous

    Maybe I’m naive to ask such a simplistic question, but considering Mercedez wasn’t able to shape up Chrysler, what makes one think a loser like GM can fare better?
    Vinny Goldberg
    PS — my Toyota still runs like a champ.

  10. Anonymous

    Agree with SapceFury, why not let Chrysler go under? Why does hte whole industry have to get a bailout?

  11. Anonymous

    Good post. I think the machinations of Cerberus are rather obvious which is that it is really looking to salvage the investment in GMAC as Chrysler is long gone. GM (or, perhaps Ford or Toyota) cherry pick what it wants from Chrysler (which is not alot, perhaps the Jeep brand) this then leads to the bailout of GM only while Chrysler goes by the wayside (Using the bank analogy, Chrysler is Bear Stearns to GM’s AIG) . By going away quietly on Chyrsler and giving politcal cover (allow some pain, don’t bail out private equity etc etc), the quid-pro-quo is TARP support for GMAC – which lets GMAC stay out of bankruptcy while GM reorganizes thus preserving Cerberus investmetn in GMAC. If (yes, a big if), GM comes out of Chapter 11 a leaner but meaner company then GMAC will have some significant value as well. I’m hard pressed to see a viable recovery scenario for Cerberus’ Chrysler investment. Long term survival of GM means value for GMAC so that is the better dog (pun intended) for Cerberus in this race and it is rational for it to use its Chrysler ‘chip’.

  12. tompain

    I don’t care what the government does to help the employees, even if it is a little wasteful and “unfair”. It is ok with me if the government wants to “save” the companies, at least for the moment. The only thing that is not ok with me is for equity not to be wiped out and for bondholders to get anything more than they would get in bankruptcy. If the government effectively provides DIP financing, it is senior to the bondholders and they can have whatever is left after the government is repaid. A rescue of the bondholders is a subsidization of debt capital that will only send a message to the capital markets that equity is for fools but debtholders are special. This message has already been sent too many times: BSC, WM, FNM/FRE, AIG. That’s the wrong message to send at a time when the economy needs more than anything to delever.

    I also think that the dealer cartels that are in place only because of state laws that were manipulated by those very dealer ought to be busted and a lot of dealers ought to go under.

  13. wunsacon

    Maybe Cerberus doesn’t think it will get a good deal from the Treasury. But, if they first merge with GM, they improve their likely recovery outcome.

  14. Anonymous

    Let Chrysler fail… Cerberus, a private equity firm, should not receive a dollar of taxpayer money, especially after running Mervyn’s Department Store into the ground, causing 18,000 job losses.

  15. Anonymous

    One of the primary issues for the auto industry is 50-75% overcapacity. Another issue is GM’s legendary ability to build crap and use advertising to mask the smell. A third issue is GM’s corporate culture of “say yes and pass the buck”. Bankruptcy and an auction should be the prescription.

  16. Anonymous

    Consumer surveys have found that as many as 80% of prospective car buyers would be leery of purchasing a car from a manufacturer in Chapter 11.

    But that snippet doesn’t give you the whole picture, does it? We should also try to find out:

    1. If these results are replicable in any study not sponsored by CAR;
    2. How high the percentage of people is who wouldn’t buy from a manufacturer which is teetering on the edge of bankruptcy (it’s probably not far off from that 80% figure); and
    3. How high the percentage of people is who wouldn’t buy from a manufacturer which is the recipient of a government bailout (and I guarantee you there are plenty).

    Without these three facts, the one you quote about is not very illustrative.

  17. S

    Agree with comment above. this is all about Cerebus trying to maintain a grip on GMAC. While they are negotiating with the Gov they are trying to cram down GMAC bondholders. In a juts o9utocme verebus would be taken to zero, but they will hold the threat out of choking the american people. Who would seriously want to own Chrysler anyway. So is it really a surprise that they are willing to give it away.

    I write this as obama is in the background talking about ethics on wall street and changing the game. The rpoblem Obamason is that change the game and it ends the scheme. It is kind of like Free Trade and globalization; change the game to right the excess and you strip out the grease that makes it worthwhile.

    Scarcity in profits is the new breadline

  18. Anonymous

    GM has denied that there are any talks. I think the shuttering of the factories is a) an attempt to preserve cash to an Obama administration and b) a we dare you not to give us cash to the Bush administration.

    My guess: Bush gives nothing but offers a BK package. GM and Chrysler refuse and run on fumes until Obama is in.

  19. Anonymous

    Has the weight of dealer networks been covered here or elsewhere before?

    I’m curious as to how this is as big or larger an issue for these companies. Is it that UAW contracts have already been renegotiated?

    Any links would be much appreciated.

  20. Anonymous

    UAW must be made to wake up and face reality. Do not know if Obarama crew & Dems. will make them do that since big money and support came from UAW (and other unions' money). Yes, management
    needs to make some changes too.

    Jeep is a good product.

    As for Cerberus & others of same ilk, should be a special region of Dante's Inferno for their ransacking Vulture Capitalism.


  21. FairEconomist

    A rescue of the bondholders is a subsidization of debt capital that will only send a message to the capital markets that equity is for fools but debtholders are special. This message has already been sent too many times: BSC, WM, FNM/FRE, AIG.

    Yes for BSC, FNM/FRE, and AIG; but the opposite for WM where the bondholders got almost nothing while unsecured depositors (theoretically at the same level) got every penny. The Feds have not been consistent.

    I like the idea of BK’ing Chrysler as a “trial run”. However, Chrysler is the weakest of the Big 3 both financially and in terms of quality (both Ford and GM have top-quality brands in spite of their rep; Chrysler does not).

    There are definitely people who like the GM brand, like me. I buy Chevys because although they’re not *quite* as good as the top non-luxury brands like Honda, Toyota, Mercury, and Buick, they’re pretty close and WAY cheaper.

  22. charlie

    Yves is quite right that the problem is dealers, not the UAW.

    Assume you adjust the UAW contract to japanese-level wages and benefits. Estimates are you save $800 per car — which is not a lot, but not a little either,

    Based on November sales, GM is on track to only sell 1.8 million cars in the US. Assuming all are UAW built (and they are not — a lot are imported) that would give you a savings of $1.4 billion dollars a year.

    Right now, GM is burning several billion a month. Destroy the union, you’ve saved about two weeks of cash flow.

    Any car bailout needs to be linked to a demand side increase. Regardless of the effect on consumers on BK, GM is not selling enough cars right now to make it through next year.

  23. tompain


    Sorry, I meant WB, not WM. Gets hard to keep the failed instituions straight without a scorecard now. You can also argue the same debt subsidization has taken place at C, MER, GS

  24. ps

    I agree with tompaine that a bailout of the equity holders in any of the auto manufacturers is a travesty. I’d like to see a discussion of “what” is being “saved”. Words are important here – “bankruptcy”, “bailout”, “failure” mean different things to different people. I would like to see the “economic production capacity” of the industry “saved”. To fund anything else is corporate welfare. Do GM and Chrysler have any “economic production capacity”? Who should be the judge of that? Congress? The administration? Investors? To me the answer is obvious – investors risking their own capital. Call it what you will but a mechanism that quickly puts the “economic production capacity” of GM and Chrysler up for sale in whatever pieces investors have interest in (production facilites, brands, etc.) while protecting taxpayer advances to buy the necessary time (liens on assets) is as far as the govt should go. Equity holders are wiped out and the liabilities are settled with the proceeds as contracted and by law.

    To return to my recurring theme GM is bankrupt already with a $60B shareholders deficit ($110B of assets, $170B of liablilities).

  25. Anonymous

    Cerberus is going to give away the upside to the governemnt??? Isnt that the stuff valued at zero?? How about Cerberus extinguishes its debt to Chrysler, accepts all liability for actions during their ownership, return all assets they have stripped out, and turn over the entire structure to the government to run while posting a $4B credit line for the government to run it. Oh not a good deal for Cerberus? I guess they wont do it.

  26. mft

    Does anyone know of ANY EXAMPLE anywhere in the world of a government bailout successfully restructuring an entire industry so screwed up as the Detroit car makers?

    If the answer is no, then it’s obvious there has to be some kind of Chapter 11 procedure.

    Surely Yves is right that this will reduce buyer interest even more than is already the case. For the moment, the affected firms will just have to win that interest back with massive price discounts or else maybe a 10-year servicing guarantee. That will cost, of course, but in this case it would be money well spent, because there just might be a healthy industry come out of it.

    I don’t think the fundamental problem with the Detroit car makers is either the UAW or the dealer networks. It is the moribund institutional framework that runs these companies, and you can only take a sledgehammer to that with a bankruptcy.

  27. Taken For Granite

    Does anyone know of ANY EXAMPLE anywhere in the world of a government bailout successfully restructuring an entire industry so screwed up as the Detroit car makers?

    That one is easy.


  28. Anonymous Monetarist


    Am unawares as to whether or not you reported this but in the bailout plan that was scuttled there was language similiar to the Wells Fargo tax exemption. Methinks Cerberus is in talks because they can monetize GM losses.

  29. Anonymous

    Any car bailout needs to be linked to a demand side increase.

    Exactly, and that market is GONE. Even if the Big 3 were sitting on $500 billion in cash the end result would be the same – disaster and massive job losses. Nobody is going to buy the cars – because the market is not longer there. The credit bubble burst – people aren’t going to buy cars they can’t afford anymore, and people aren’t going to buy a new car every 2 or 3 years. The party is over. Toyota, Honda, etc. have sales that have cratered too. The whole market has changed. Bailing out the Big 3 only delays the inevitable – at taxpayers expense.

  30. Blue

    Do GM or Chrysler own any successful brands? Are any of their parts making money anywhere in the world? What would a triage look like? Could the successful parts survive if separated from the rest? If the parts that were completely dead weight were removed, would that help? No one seems to be asking these questions.

  31. Anonymous

    Must also add that the Pacifica is a great vehicle for the market segment.

    Obama drove one of its big sedans before he ran
    to take on his role as U.S. Gov. Chief Coach ( or a
    Prime Minister role). Never to be termed on the same level as a Geo. Washington. ( the role and structure long over due for change[felt the same re Bush as only a legacy and successful ad campaign])

    Chrysler made good products for decades.

    smart advisor

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