Lots of people seemed to think it was a good idea in May 2007 when $24 billion, New York–based hedge fund and private equity firm Cerberus Capital Management led a consortium of investors in buying an 80.1 percent stake in the smallest of the big three Detroit automakers.
The move was “hailed at the time for returning Chrysler to U.S. control,” lawyers representing some of the company’s lenders recalled two years later in a May 5 court filing, five days after the carmaker declared bankruptcy. Cerberus, whose name is taken from the mythological three-headed dog who guards the gates of the underworld, was considered a savior in Detroit. Now it’s just one of the losers. The firm has kept the details secret, but much of what is thought to be its $700 million equity stake has been wiped out, and it has written off its $500 million portion of a $2 billion second-lien loan made to Chrysler Motors last June. But as recently as December, Cerberus was insisting it had gotten in at a good price, with co-founders Stephen Feinberg and William Richter standing pat in a letter to investors. “We still believe we bought well,” they wrote. “In those cases, we got caught in what we see as a ‘perfect storm’ in the auto and housing sectors.”
Cerberus has taken its beating, but other hedge funds with a stake in Chrysler are still fighting, refusing to go along with the U.S. government’s proposal to force first-lien lenders to take 29 cents on the dollar while more junior creditors are made whole. The most vocal resisters — including Foxhill Capital Partners, Group G Capital Partners, Schultze Asset Management and Stairway Capital Advisors — are being vilified by, among many others, President Barack Obama.
Defenders of the hedge fund industry are railing against the government’s actions, which go against the precedent that puts lenders at the head of the queue of creditors. “The policymakers are walking a very thin line,” says Lendell Porterfield, co-founder of Washington-based lobbying firm Porterfield & Lowenthal, which represents the Coalition of Private Investment Companies.
The collapse of Chrysler has been a fiasco for the hedge funds. But public sympathy lies elsewhere, as the automaker announced in mid-May that it will eventually close 789 of its 3,181 dealerships and Detroit’s suffering continues to ripple through the economy.
