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Cerberus Starting to Get Some Attention
Posted by: MichaelW on Wednesday, December 10, 2008

As I wrote about last week, one thing in particular that truly stinks to high heaven regarding the Big 3 Bailout is that Chrysler's parent, Cerberus Capital, has more than enough money to fund whatever the ailing carmaker needs. If they aren't going to do so, then why should the taxpayers?

It seems that the stench is finally getting some attention:
Why is Cerberus, one of the world's richest private equity firms, begging for a bailout?

When I wrote about the bailout blunders of the auto industry two weeks ago, I thought the Big Three had most likely topped out on the political outrage meter. But that was before the shady story of Cerberus, the uber-connected private equity firm that owns Chrysler, reared its three ugly heads over the weekend.

Buried on the business page of The New York Times Saturday were the details of Detroit's biggest snow job yet—literally as well as figuratively. Turns out that Cerberus CEO John Snow, who spent three-and-a-half lackluster, and some might say lap-doggish, years as President Bush's second Treasury secretary, is leading a who's who of crony capitalists in a lobbying campaign for a taxpayer bailout to "salvage Cerberus' investment in Chrysler."

That's right. Not to save the jobs of Chrysler employees or America's disappearing manufacturing base, mind you, but to prevent "one of the world's richest and most secretive private investment companies" from having to take a relatively modest financial hit and use some of its own capital to prop up the smallest of the major automakers.
There's a lot more at the link, so RTWT.

Of course, the focus on Cerberus does not mean that Chrysler is singularly unworthy of taxpayer funds. Chrysler has a bountiful source of funds available to it, so it simply has no need to go begging for our money. GM is unworthy for the following reason [HT: HAHL]:
December 10, 2008 Stat of the Day

In 2007, Toyota sold 9.37 million vehicles.

In 2007, General Motors sold 9.37 million vehicles.

In 2007, Toyota made $17.1 billion.

In 2007, General Motors lost $38.7 billion.

(Source: Mises Blog)

That's right. For the same volume of cars sold, GM managed to run into the red $38.7 Billion while Toyota earned over $17 Billion in profit. There's more:
That was the second best sales total in GM's 100-year history and the biggest loss ever for any automaker in the world.

For Toyota, that was roughly $1,800 in profit for every vehicle sold. For GM, it was an average loss of $4,100 for every vehicle sold.

Collectively, Detroit's Big Three automakers are currently losing about $5 billion per month, with Ford, General Motors and Chrysler, respectively, burning through $2 billion, $2 billion and $1 billion in cash every 30 days.
So Chrysler already has a sugar daddy, and the entire lot of the Big 3 can't manage to turn a profit, even when GM records its second biggest sales volume ever. Aside from purely principled reasons as to why a bailout is a horrible idea, the facts above plainly show that the Big 3 simply don't deserve our financial support.

Build a better car at a reasonable price and you will have all the financial support you need. Until then, your business model just doesn't cut it in this industry, and it needs to go the way of the dodo.
 
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Hammer... Nail...Bang!
 
Written By: Lance
URL: http://riskandreturn.net
I have a colleague in Florida who still insists that UAW employees and (especially) are *owed* whatever they gained in contract negotiations over the years. I asked him why I (and other taxpayers) have to "fulfill the contract" when I wasn’t a party to it. I’m awaiting his answer.

He should know better. He teaches economics and budget.

UAW wages and benefits amount to $72+/hr no matter what the UAW says. Legacy costs add almost another $30/hr. The average UAW worker makes $30/hr in wages and gets 315 hours of overtime each year (at time and a half, or double time on Sundays, plus shift differential). That’s now insupportable.
 
Written By: jorgxmckie
URL: http://
"In 2007, General Motors lost $38.7 billion."

This is either a complete lack of understanding or a deliberate lie to imply that had anything to do with their normal year to year operations.

GM to comply with Sarbanes-Oxley had turn move previously listed capital assets into funded obligations. No money was moved or lost, but reclassified according to new accounting rules. Whether it is a case of SO going overboard or something GM should have been classifying as debt all along, it was an exception built up over decades.

Its also why the year 2007 was cherry picked in the original discussion.
 
Written By: jpm100
URL: http://
jpm100:
This is either a complete lack of understanding or a deliberate lie to imply that had anything to do with their normal year to year operations.
Compared to what? Toyota was operating in the same industry, during the same time frame regardless of how far back you wish to go with loss carried forward, and managed to make a significant profit. GM absorbed a huge loss, despite have its second largest volume of sales ever. There’s nothing misleading about that. Otherwise, why isn’t Toyota clamoring for a handout?
Its also why the year 2007 was cherry picked in the original discussion.
That year was "picked" most likely because it was the last year reported. If you have other numbers for comparison feel free to offer them.

jorgxmckie:
UAW wages and benefits amount to $72+/hr no matter what the UAW says. Legacy costs add almost another $30/hr.
I think you’re exactly right. This article from James Sherk seems to eviscerate the argument that the $72+ number includes those legacy costs:
These figures are based upon calculations by the Detroit automakers themselves as published in SEC filings, their annual reports, and other materials. According to briefing materials prepared by General Motors, "The total of both cash compensation and benefits provided to GM hourly workers in 2006 amounted to approximately $73.26 per active hour worked."

[...]

Critics contend that these benefit figures include the cost of providing retirement and health benefits to currently retired workers, not just benefits for current workers. Since there are more retired than active employees this makes it appear that GM employees earn far more than they actually do.

This contention contradicts the plain meaning of what the automakers have reported in SEC filings and in their public statements and would be contrary to generally accepted accounting principles.

Under the accounting rules established by the Financial Accounting Standards Board, the Detroit automakers must report their liability for future benefits as they accrue.[6] The hourly benefits figure includes payments into defined benefit pension plans to provide future pensions to current workers. It also includes the estimated costs of future retirement health benefits that current workers earn today.
In short, the automakers reported the numbers themselves in their SEC reports, which numbers must adhere to GAAP. Pursuant to GAAP, the legacy costs cannot be included in the hourly wage number. Ergo, the $72+ number is the current cost to GM et al. of employing its UAW labor.

Lance:
Hammer... Nail...Bang!
:^)
 
Written By: MichaelW
URL: http://qando.net
jpm,

It doesn’t matter whether it is a lack of understanding, a distortion or meant exactly how he says it (which is entirely accurate.) They lost 39 billion. If it came from previous years, it just means that they had built up stunning losses in previous years that their accounting obscured. Anybody who follows these companies know they essentially never cover their cost of capital, which means cash is constantly needing to be replenished by debt. Their profits have been an accounting fiction for years. No free cash flow to speak of for decades.

Their bond holders are idiots for lending the money all this time. They should have entered bankruptcy long ago due to an inability to get financing for their "year to year" operations, but bankers and bondholders have allowed the madness to continue with the complicity (once again) of the ratings agencies. Why? I’ll tell you why. Because the people selling the bonds always said "too big to fail."

Which hits another key point, do you think the industry will without bankruptcy allow themselves too become small enough to fail? That is exactly what they need to do, and what politicians dishonestly claim they expect, but of course that can happen in bankruptcy and they all know it. Congress isn’t going to force them to cut themselves by two thirds, because that is exactly the trauma they are trying to avoid now.

The fact is on current operations they lost money as well. Michael’s point stands, as presently structured they are not viable.

My own estimate is that assuming the economy recovers fairly quickly (which I think unlikely)they will continue to burn cash for many, many years and need 175 billion at least just to shrink down in size and shed as many jobs as a bankruptcy would lead to now. Even then, they still might go out of business since companies do that on occasion. Competition and all that.

All the tens of billions of support, restructuring (assuming it happens) and protection still does not mean they will survive. It just gives them a chance. Meanwhile companies that do not return less than their cost of capital will have resources diverted away from them.

Cerberus blew it. They should have waited for Chrysler to go under, buy the assets in a fire sale and start over. Lots of Chrysler employees would have been happy to take part. Instead they bought a lemon.
 
Written By: Lance
URL: http://riskandreturn.net
Ignoring the past, would you voluntarily invest in this enterprise, now, other than to break it up and dispose of its assets? I wouldn’t, and I cannot fathom why the government thinks it is OK to incur an obligation in my name to do so.

 
Written By: MarkD
URL: http://
The question ’Who would buy a car from a bankrupt company?’ was asked awhile back. I don’t think that would deter anyone, but perhaps the question ’Who will buy a car from a bailed out company?’ should be asked. As unpopular as the bailout is, perhaps there will be so much ill feeling and resentment that people will buy cars from other manufacturers out of protest, in addition to the other reasons.
On the other hand, perhaps more people will buy cars from the Big 3, on the grounds that they have to protect their investment.


"Turns out that Cerberus CEO John Snow, who spent three-and-a-half lackluster, and some might say lap-doggish, years as President Bush’s second Treasury secretary, is leading a who’s who of crony capitalists in a lobbying campaign for a taxpayer bailout to "salvage Cerberus’ investment in Chrysler." "

AHA! A Bush connection!
Hopefully this will encourage more opposition to the bailout, or at least a weakening of support.

When he was bought out by GM, in one of his more lucid moments, H. Ross Perot gave a little speech pointing out that although the UAW was the reflexive scapegoat for GM’s (and the other auto manufacturers’) problems, management in fact was at least equally responsible. I tried to find it but was, alas, unsuccessful. He pointed out that management decides what product the worker will build, how and where and when he will build it, which tool(s) he will use, how and where he will use them, etc.

 
Written By: timactual
URL: http://
Just drop CAFE, it’s that simple. Let companies make what they think consumers will buy.
 
Written By: TheOldMan
URL: http://

 
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