Auto Industry Bailout

by Azreel | December 9th, 2008

Lawrence Lessig has this to say about the auto industry bailout. Both the auto industry and the banking industry are insanely inefficient. They have been for decades. And rather than being saved from a shock, both need a significant shock to management to radically change how they do business.

Perhaps the shock to banking would be too great just now. I’m willing to be persuaded that intervention is necessary there. But the more I read about the auto industry, the less I am convinced.

People speak about this as if not bailing out Detroit means automobile production in America ends. That’s not what failing to bailout Detroit means. Not intervening now would be these automakers would enter bankruptcy. And bankruptcy means the assets of these dinosaurs get reorganized: Someone else buys these companies, at a price the market sets, and runs them profitably, because of the price the market set.

But that’s not how the system has worked in the past. When Chrysler started to founder, it found a willing buyer in Diamler. Diamler decided that Chrysler was a lost cause, and sold it to Cerberus, making Chrysler a privately owned company. Cerberus and Chrysler don’t have to open their books to anyone, so no one really knows with certainty how the balance sheets add up, except for their CFO.

Isn’t it interesting then that Cerberus has been aggressively lobbying for the bailout package? Consider the following from the New York Times.

Cerberus is also pursuing its interests aggressively in Washington, where some lawmakers have questioned why the government should assist the privately owned Chrysler. In addition to Mr. Snow, the firm’s chairman, Cerberus’s Washington hands include Dan Quayle, the former vice president, and Billy J. Cooper, who has worked as partner at the lobbying firm Patton Boggs.

The firm has also hired Arnold I. Havens, a former general counsel of the Treasury Department; John B. Breaux, a former senator from Louisiana; David Hobbs, former assistant to President Bush for legislative affairs; and Christopher A. Smith, former chief of staff in the Treasury. So far this year, Cerberus has spent nearly $2 million on lobbying, while Chrysler has spent $5 million, according to Senate records. Ford has spent more than $5 million and G.M. $10 million.

Mark A. Neporent, the chief operating officer of Cerberus, said his company was focused on doing what was best for Chrysler and its employees, as well as for its own investors. Cerberus has pledged to forgo any fees that it might have collected on its Chrysler and GMAC investments if Chrysler receives money from the government, he said.

“We’re not in this for the money,” Mr. Neporent said in an interview earlier this week.

Not in this for the money? Really??! A private corporation not interested in making money? Stop the presses!

Cerberus has shown again and again that the money is precisely what they’re after. In fact, they’re one of the most efficient companies in the world at getting a fast profit out of their investments.

The article continues:

Such magnanimity would be a departure for Cerberus, which has a history of extracting profits quickly from its investments. The firm was co-founded in 1992 by Stephen A. Feinberg, a former trader at Drexel Burnham Lambert, the now defunct junk-bond powerhouse.

Mr. Feinberg has made a lot of money for himself and his investors. Between 2002 and 2007, as an unprecedented wave of buyouts tore through corporate America, Cerberus pulled money out of its portfolio companies more quickly than its peers in the buyout business, according to a study by Moody’s Investors Service.

“These guys are very financially astute, and they will do whatever the market will bear,” said John Rogers, a senior vice president at Moody’s who worked on the report.

Cerberus has not extracted dividends from Chrysler or GMAC, according to a Cerberus executive. But after Cerberus acquired Chrysler, it quickly split the car company from its finance unit, Chrysler Financial, with the hope of combining Chrysler Financial and GMAC.

Pardon me while I don my tinfoil hat for a moment, but isn’t it convenient that Cerberus has these massive political connections? Is it possible that such a successful company might have foreseen this golden parachute in the form of a massive bailout as the escape route they needed should they not be able to break even in the Chrysler deal?

Finally, a graphic to go along with this little rant.

Auto Bailout

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