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Stop the GM/Cerberus/Chrysler Bailout!

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  • Stop the GM/Cerberus/Chrysler Bailout!

    Stop the GM/Cerberus/Chrysler Bailout!

    The GM/Cerberus/Chrysler Bailout is bad for taxpayers and doomed to fail without the benefits of a Chapter 11 filing for both Chrysler and GM

    Editor's Note: The following analysis of the proposed GM/Cerberus/Chrysler Bailout plan now before Congress was written by a New York City bankruptcy lawyer who wishes to remain anonymous. The letter was originally sent to our favorite auto review site and is reprinted here with permission of the site's management.

    Cerberus Capital, a highly secretive NYC-based vulture investment fund, wants the U.S. government and taxpayers to bail out its failed investment in Chrysler and its failing investment in GMAC. Its partner in this raid on the US Treasury is General Motors. GM, after spending a decade making gas guzzling trucks and SUVs to sell at high margins due to a loophole in US air pollution laws, and becoming over-dependent on revenue from its financing arm by exploiting easy credit policies of the Federal Reserve, now finds itself insolvent after a predictable rise in gasoline prices and a credit crunch revealed the weakness in the company's business strategy. In spite of apparent failures of leadership that have led to the company's current dire condition, the CEO earns $40,000 a day. Meanwhile, innovative new automobile companies, such as Tesla Motors, that use private capital to develop the next generation of cars struggle to raise $100 million in the private markets to compete with mismanaged dinosaurs that receive billions in aid from the government.

    Is this any way to run an innovation economy?

    Here’s why a bailout for GM and/or Chrysler is a bad idea.


    Cerberus Capital uses hedge funds as the vehicles in which to invest in various companies. Apparently, the hedge fund known as Cerberus Series 4 is the owner of an 80 percent interest in Chrysler and a related fund owns or controls a 51 percent interest in GMAC. Not surprisingly for a company known for its secrecy, Cerberus has not disclosed which entities actually own the interests in Chrysler and GMAC, has not disclosed what fees Cerberus has taken or accrued from its investments, and has not disclosed what severance payments would have to be made if GM actually acquired Chrysler. For example, would Chrysler CEO Bob Nardelli get another big payday if he’s cut loose in a merger? The interrelationships among GMAC, Chrysler Financial, Cerberus and other entities are also a well-kept secret.

    Secrecy, Secrecy, Secrecy

    Why is everything so secret? What happened to the idea of open government? A few questions come to mind:

    1. Exactly what is the Cerberus/GM proposal to borrow $10b from the US Treasury in order to fund a merger, the terms of which are also secret? Is it in writing? Where is a copy? What were the proposed terms that were rejected by the current US Treasury? Is another proposal in the works? How is the $10b going to be repaid by two insolvent auto manufacturers?

    2. Which lobbyists represented GM and Cerberus in getting their loan application before the US Treasury? How much were the lobbyists paid? With whom did GM/Cerberus meet? Where are the notes of any meeting or other communications about the loan proposal?

    3. What do we know about the financial condition of the proposed borrowers? Where is Chrysler’s current balance sheet and income statement? Surely Chrysler is insolvent on an equitable basis, and probably insolvent on a balance sheet basis. Why is basic financial information not available for public inspection and comment?

    4. Where are the financial statements for the Cerberus Series Four hedge fund? US taxpayers are being asked to bailout the failed auto related investments by Cerberus Series Four, while the profitable investments in the same fund are not being shared with taxpayers.

    GM is woefully insolvent and should file Chapter 11

    5. As of June 30, 2008, GM had total assets of $136b and total liabilities of $191b, a $55b deficiency. Thus, GM is insolvent. How can GM ever repay a $10b bailout, or any bailout for that matter? As of June 30, 2008, its liabilities were $70b, dwarfing its current assets of $55b. Moreover, we do not know what deals GM has made to stretch/defer repayment of its account payables.

    6. Is Chrysler in any better shape than GM? Probably not, but without a current balance sheet the definitive answer is a secret.

    7. Assuming Chrysler is insolvent (liabilities exceed assets), then the equity interest of Cerberus and Daimler (the 20 percent equity owner) are worthless and these entities are not even entitled to a seat at the merger negotiating table. The real economic owners of Chrysler are its creditors and employees, who are also in the dark about the proposed US treasury bailout.

    Who really benefits from a GM/Cerberus/Chrysler merger?

    8. The US taxpayers can’t benefit since there is no repayment plan. Not surprisingly, Cerberus and its hedge fund are back door beneficiaries, because the 51 percent Cerberus ownership interest in GMAC will increase in value if GM and GMAC survive. Chrysler is a lost cause, but with the value of the Cerberus investment in GMAC also plummeting, Cerberus is trying to prop-up GMAC by helping GM survive. Is Cerberus pledging its equity interest in GMAC to the US Treasury as security for a government loan to GM? Why not? Is GM pledging its 49 percent equity interest in GMAC to secure repayment of any loan by the US Treasury? More secrets kept from the public.

    9. The self-dealing by Cerberus extends to wanting to cherry-pick the Chrysler assets and keep the auto financing arm for itself. What is the value of the Chrysler auto financing business, and why should Cerberus benefit?

    10. GMAC had negative net income of $3b for the first 6 months of 2008. GM’s ownership interest in GMAC was impaired by at least $2.7b during the same six month period, meaning that Cerberus Series Four hedge fund had suffered a similar loss in value in its investment in GMAC. Why should taxpayers bailout the millionaire investors in the Cerberus hedge funds?

    More secrecy and lack of disclosure

    11. Does GM plan to make any payments to GMAC, payments that directly benefit Cerberus? As vehicle residual values decrease, GM is obligated to make payments to GMAC under “residual support and risk sharing” agreements. On August 6, 2008, GM paid GMAC/Cerberus $646m, money which could have been used by GM to fund its ongoing operations and its obligations to employees.

    12. Should any taxpayer money be used to fund payments to GMAC/Cerberus, whether that money is used directly or indirectly? How much, if anything is Cerberus investing in new money to prop up its investment in GMAC? If it is not investing in Chrysler or GMAC we can reasonably conclude that its analysis shows that the investment is a bad one. What’s bad for Cerberus is bad for the US Treasury.

    Although it appears that the Cerberus Series Four has money available to make follow-on investments, it makes no sense to throw good money after bad if you can lobby the US Treasury to make the bad investment for you. A related question is whether the Cerberus equity interests in GMAC are going to be used as collateral for the loans that will be used (albeit indirectly) to bailout GMAC. Why should equity bear none of the risk but get all of the benefit?

    More non-disclosure

    13. What is Cerberus ResCap Financing LLC and who has seen its financial statements or the agreements relating to the $3.5b secured loan facility? How is this secured loan impacted by the bailout of Cerberus/GM/Chrysler?

    Deepening insolvency is likely

    14. GM’s current insolvency and continuing losses will trigger additional liabilities, and make it doubtful that GM will be able to make payments promised to employees and former employees or perform its labor agreements. GM’s worsening financial condition also deepens its losses from its derivative contracts. How would a GM/Cerberus Chrysler merger affect these liabilities? Will any government loans be used to reduce the $30b of GM accounts payable, or, in the event of a merger, to pay down Chrysler accounts payable in some still unknown amount? Sadly, we don’t even know what Cerberus proposed as the use of funds and we have no idea how Cerberus will benefit since we have no financial information on Chrysler or Cerberus.

    15. As GM and Chrysler idle plants and facilities, more employees are laid off the employee related liabilities of GM/Chrysler will increase by hundreds of millions. Since GM and Chrysler are insolvent, who will pay these increased costs? Can any of these costs be avoided in a Chapter 11 case of Chrysler or GM?

    16. Should taxpayer money be used, directly or indirectly, to pay GM and Chrysler obligations that are coming due while these entities are unable to pay from their own assets. Surely not, but what is being proposed, and who will benefit if GM debt is redeemed at par by vulture investors that bought the debt at pennies on the dollar? A related question: will any Cerberus entities benefit from government funded redemptions of auto maker debt? Is it possible that Cerberus is trading in credit default swaps and actually benefiting from the difficulties of Chrysler, GM and GMAC? Yet more items of non-disclosure on a long list of secret items.


    17. GM, GMAC and Chrysler are not credit worthy and are unable to borrow money on any basis, secured or unsecured.

    What’s Good for GM/Chrysler is a Chapter 11 Filing

    18. GM needs to be restructured, which means it must change the terms of its legal obligations to suppliers, bondholders and employees. The only vehicle to accomplish the needed changes is Chapter 11, which lets GM reject unfavorable contracts, renegotiate its debt obligations, defer interest and principal payments and gives it time to fix its business. Without a chapter 11 filing a government infusion of $10b cash will be gone in six months when GM uses the money in 2009 to pay bondholders and employees billions of dollars, payments which do nothing to help GM survive.

    19. Chrysler, the stepchild of a distressed debt vulture fund, is also a prime candidate for Chapter 11. But Chrysler should be liquidated, not reorganized. A liquidating Chapter 11 case, expressly permitted by the Bankruptcy Code, can be used to keep Chrysler operating while its divisions are sold. With adequate Chapter 11 funding line workers can keep their jobs and benefits, and non-essential executives can be fired at minimal cost to the Chapter 11 debtor, known as the debtor-in-possession. Trade creditors will continue to ship to Chrysler because their post-petition claims will have a priority in payment. Chapter 11 also lets the Bankruptcy Judge appoint an examiner to conduct an investigation into the financial affairs of Chrysler and its equity owners, and to sue to recover any improper payments. Chapter 11 will also make it clear to Daimler and Cerberus that their investment is worthless and they will not be able to use their position of control to improperly benefit.

    20. Cerberus should acknowledge the financial reality and either file a Chapter 11 case for Chrysler or have a federal receiver appointed so that the value of the Chrysler assets can be maximized in an orderly sale procedure. The US government should fund the Chapter 11 case and keep Chrysler operating by giving Chrysler a debtor-in-possession loan having seniority over all other liabilities of Chrysler, thereby assuring taxpayers that the money will be repaid out of the proceeds of asset sales. The US could also give a senior secured loan to GM to help GM acquire assets from Chrysler, but this would require the cooperation of bondholders, cooperation not likely to be forthcoming. On the other hand, if GM is in Chapter 11 then the government could refinance the GM operations without fear that taxpayer money would be diverted to pay existing creditors.


    Go to the contact page of Speaker of the House Nancy Pelosi and cut and paste the following message to her today.

    As an American taxpayer I am appalled at the lack of transparency and flawed structure of the bailout of GM/Cerberus/Chrysler that is being given to these companies at my expense. Cerberus should acknowledge the financial reality and either file a Chapter 11 case for Chrysler or have a federal receiver appointed so that the value of the Chrysler assets can be maximized in an orderly sale procedure. GM should be reorganized under Chapter 11, unfavorable contracts rejected, its debt obligations renegotiated, and its interest and principal payments deferred until it can fix its business. Chrysler should be liquidated, not reorganized, under Chapter 11. The value of the Chrysler assets can be maximized in an orderly sale procedure.

  • #2
    Re: Stop the GM/Cerberus/Chrysler Bailout!

    nice of the lawyer to come up with this but no one cares anymore. we're all puked out.


    • #3
      Re: Stop the GM/Cerberus/Chrysler Bailout!

      Originally posted by metalman View Post
      nice of the lawyer to come up with this but no one cares anymore. we're all puked out.
      Agreed, this is what my house looked like after the firtst bailout.


      • #4
        Re: Stop the GM/Cerberus/Chrysler Bailout!

        Originally posted by tombat1913 View Post
        Agreed, this is what my house looked like after the firtst bailout.
        thanks. that expresses just how i feel.


        • #5
          Re: Stop the GM/Cerberus/Chrysler Bailout!

          I heard this from a Costa Rican ICE Telco installations guy regarding the meaning of GMC in Costa Rica general opinion:
          "Gastalones, Malos y Caros"; ("Gas Guzzlers, Bad and Expensive"). I took it as an expression of the distrust generated by the lack of innovation and the fondness for big cars with big engines prevalent in US auto industry.

          It is time to either let them go the way of AMX or force them to renew themselves, as was Chrysler in the times of Lee Iacocca.
          Attention: Electronics Engineer Learning Economics.


          • #6
            Re: Stop the GM/Cerberus/Chrysler Bailout!

            Rep. Lynch from South Boston is tearing them apart this afternoon....

            He just basically delivered his version of Will Hunting's NSA office visit monologue, but about the Big Three opening factories in Mexico.


            • #7
              Re: Stop the GM/Cerberus/Chrysler Bailout!

              Originally posted by FRED View Post
              Stop the GM/Cerberus/Chrysler Bailout!
              With a democrat congress and Obama as president? You got to be kidding!