Cerberus: Chrysler Not As Bad as GMAC

February 18, 2008

A new letter from Cerberus Capital Management of New York underscored the tough conditions facing its prize assets, Chrysler LLC and its 51-percent stake in General Motors Acceptance Corp. But it also challenges the conventional wisdom that GM, which lost $38 billion in 2007, is in way better shape than Chrysler.

In a letter to investors that turned up in the hands of both Bloomberg and The Wall Street Journal, Cerberus founder Stephen Feinberg seemed unfazed by the challenges facing Chrysler, which is still losing money and is down to its last $8 billion in cash.

Feinberg said in a letter co-signed by Cerberus managing director, William Richter, and distributed last month to investors in Cerberus-managed funds that GMAC is actually in more trouble than Chrysler.

The letter was written before GMAC posted another loss, primarily from the continuing trouble in housing markets, which are paralyzed by what has been described as the "meltdown" of the sub-prime market. Rescap, GMAC’s mortgage lending arm, which had posted substantial profits for GM during the housing boom, continues to bleed cash.

The losses at GMAC, coupled with the economic and credit problems created by the drop in the U.S. housing market, have damaged GM's comeback, the company's financial report for the fourth quarter indicated.

Nevertheless, Fritz Henderson, GM's chief financial officer, suggested during a conference call last week that GMAC could reach profitability by the end of 2008. He also said the he did not believe GM would have to put more money into GMAC.

Henderson's remarks clearly were part of an ongoing effort by GM to minimize investor concerns about the impact of the housing crisis on GM's underlying finances. Most analysts have accepted the reassurances since GM posted substantial sales gains last year in emerging markets and its pension fund is overfunded and thus able to help finance buyouts for 74,000 blue-collar workers.

However, Feinberg, in a nine-page letter to investors, offered a somewhat different view of the challenges facing GMAC. "We believe we bought (Chrysler) very cheaply, and we do not need to be heroes to earn a good return on our investment," Feinberg said during a critical passage in the letter.

"We have significant risk at GMAC if the credit market takes a material turn for the worse," he said. Tighter credit for GMAC also could make it more difficult for GM's customers to finance new vehicles and reduces sales dramatically. Problems at GMAC also would undoubtedly spread to other captive finance companies linked to automakers.

"We do believe GMAC will survive today's environment and do so reasonably well," but there is also a risk it could get significantly worse, noted Feinberg, who, in his letter, also accurately predicted that monolines, or insurance for specific kinds of investments, were heading for trouble.

Cerberus doesn't have to release comprehensive financial information except to its investment partners but the firm's executives are developing a habit of making selective information public.

Feinberg also noted in the letter that while he "despises" the attention Cerberus has gotten in the press, the high-profile investments in Chrysler and GMAC have made the coverage inevitable. However, the timing of the release of the letter, basically two days after Henderson's conference call, also suggest that Feinberg or his lieutenants are more than willing to use the press to send a message to GM's management that they are seeking more cash for GMAC.

Feinberg's comments about Chrysler in the letter were generally in line with what the automaker's spokesmen and executives have been saying ever since chairman and chief executive officer Robert Nardelli carelessly tossed around the “B” word--bankruptcy--while talking about Chrysler's finances.

"We believe that in the case of an ordinary recession and a normal down cycle in the automobile industry, which is typical of a cyclical industry, Chrysler will fare just fine. It is in the case of an extraordinary automotive collapse or an unusually deep recession that we worry," Feinberg said. "We have put together a world-class management team. We believe Bob (Nardelli) is one of the toughest CEO's in the country, which, in our view, is exactly what the auto industry needs.”--Joseph Szczesny

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