Snow, Quayle, Feinberg and Merkin: This Is Who Gets Our Bailout Money?

You might not think that your tax dollars should be given to a company like Cerberus Capital Management, L.P., the highly secretive, wildly wealthy, hugely powerful private equity firm.

But, well, we're not in Kansas anymore, are we?

Cerberus has been the beneficiary of not one, but two government bailouts; getting approximately $10 billion in taxpayer funds. Cerberus made two really bad bets, and the American taxpayer is breaking their fall.

Cerberus owns 80% of Chrysler and until recently, a controlling stake of GMAC. Who is Cerberus' chairman? John Snow, Hank Paulson's immediate predecessor as Treasury Secy. Who else is there? Among many influentials, former VP Dan Quayle. Steve Feinberg, the firm's co-founder, is a former junk bond trader at Drexel, and a big GOP contributor.

Cerebus owns companies that have over $100 billion in revenue per year, and their website says they also have $26 billion under management. So their exposure here is really quite a small percentage of their total assets. However, that didn't stop them from pulling all of the levers of power to get government help (Quayle and Snow both personally lobbied government officials). Weird how Quayle and Snow didn't show up on televised public Congressional hearings, though, huh?

As a completely unregulated private equity partnership, Cerberus has no public reporting requirements. In fact, they are now explicitly refusing to disclose their financials, or the financials of Chrysler, even after the bailout. Therefore, we have no idea what management fees they are pulling out of the company, even as we bankroll their continuing operations.

In their defense, turning Chrysler around has apparently been tougher than the geniuses at Cerberus thought it would be. Here's Steve Feinberg last January:

"We believe we bought the company very cheaply, and we do not need to be heroes to earn a good return on the investment."

Hmmm.

Cerberus has now had to give up control of GMAC, as part of the bailout deal. However, because of the infusion of government equity, Cerberus and its investors have been assured a relatively soft landing. At the behest of lawmakers, Cerberus has also promised to provide $2 billion in new equity to help GMAC. Why didn't they do this before a government bailout was necessary?

To cap all of this off, the man Cerberus hand-picked to be chairman of GMAC is hedge fund giant Ezra Merkin. Merkin has reportedly lost $1.8 billion in Bernie Madoff's Ponzi scheme, and he is being sued by NYU for "unauthorized" investments of University money with Madoff; New York Law School is suing Merkin over the $3B they lost with Madoff; and Yeshiva University is also blaming Merkin for their massive losses.

Word now is that Merkin will resign his post at GMAC. Gee, why, I wonder?

These are the people we are bailing out??

Just asking:

How much money has Cerberus made in management fees in the past year from Chrysler and GMAC?

Why has John Snow not been asked to testify before Congress?

If, as John Snow has argued, "the involvement of private investment in the economy, as seen in the Chrysler purchase, offers perhaps the last best hope of turning around the auto industry and basic manufacturing in the U.S.," why is he now begging for government funds?

Will Treasury force disclosure of Chrysler and GMAC financials now that they have been bailed out?

Will / should Cerberus be forced to liquidate assets / 'take a haircut' on other investments to keep Chrysler alive, just as the American taxpayer is doing? (after all, Snow has said keeping the car company alive is a patriotic duty!)

Comments

[schatsie]

Free Lunch talks about SNOW, he cut the maintenance on the CSX line so he could get a bonus... then when people were killed he got a law exempting the railroad for any liability.... SMOOTH MOVE, but would I loan/give a penny to this man, heck no!

[kellygrrrl]

Did Dan Quayle fill out the two-page TARP app. in crayon? Was he able to spell his name?

[philopatris]

YES Merkin is the chairman of GMAC. YES it's run by Cerberus. And YES I have been waiting since before Christmas for some responsible journalist to get on this story and run with it.
It's a lot more important story than whether the auto industry CEO's got to Washington on a plane, a car, or a bicycle.
A lot.
I can't believe this is nearly the first full piece I have seen devoted to this criminal situation.

[nova07]

If somebody is willing to give you free money that you might never have to pay back, you take it. Don't hate the player, hate the game.

[mommadona]

Sounds like a good story to build on.

Thanks for the 'heads up'.

[nova07]

Portfolio companies don't pay management fees, investors in the funds do. They are typically in the 1-2% range depending on the fund.

[metsexile]

No, not really true. Investors in a hedge fund or in a private equity fund do pay management fees. however, when a private equity group buys a company, they generally charge the acquired company management fees for the expertise and consulting they (presumably) bring to bear. These fees can be very, very large.

[nova07]

Whichever private equity group you are affiliated with may charge excessive management and consulting fees to its portfolio companies but with buyout funds, like Cerberus it would do them no good.

Management fees go to the management company within the fund, which handles the funds back office operations. The GP entity is usually a separate limited liability company within the fund where the partners and principles invest their money. They are the ones who receive the carried interest and that is where the partners and principles make their money. The GP receives 20% of all proceeds from the sale of the portfolio company at exit time if they are able to reach a certain hurdle rate of return. It is in the best interest of the fund to maximize the value of the investment prior to exit so it does the fund no good to charge excessive fees that are potentially harmful to the portfolio company.

Yes, the portfolio companies do make distributions to the fund, but that includes both gains and losses. Regardless, the fund owns the company and the partners can manage it anyway they want to.

[joebaggadonuts]

There are laws they are violating. RICO can pull them all in. We have built enough jails for the folks who use drugs, now let them out and put these guys in.