First, one needs to understand the Chrysler holding company structure which is comprised of a holding company owned by Cerberus and Daimler that in turn owns Chrysler Auto, Chrysler Finance, and Auburn Hills headquarters real estate. Chrysler Auto is a standalone entity financed with non-recourse bank loans [$7 bil (orig $10 bil) 1st mortgage + $2 bil 2nd mortgage (Daimler $1.5 bil/ Cerberus $500 mil] and $5.4 bil equity from Cerberus. Chrysler Financial, the primary funding source for Chrysler dealers and car buyers, is financed separately with an est. $36 bil in non-recourse debt [$6 bil 1st mtg bank loan, est. $30 bil in asset backed securitizations, and $1 bil equity from Cerberus. Auburn Hills is financed separately from Auto and Finance and has an est. $225 mil 1st mtg. The RE was appraised at a value of $800 mil back in spring, 07. Thus Chrysler Auto remaining viable was critical to Auburn Hills’ value.

Cerberus hoped they were getting Chrysler Auto-Finance cheap by only paying $7.2 bil for a company that Daimler paid $38 bil for in 1998. However, it was more likely they were more intent on buying Chrysler Finance and if they could turn around C-Auto that would enable C-Finco to become profitable. If that worked the real value would come from the finance company and less so the auto company. When buyers look at buying finance companies they tend to value them based on a multiple of book value.  I believe that $6.45 bil (net for $950 paid to Daimler and $300 in cash already on the balance sheet) is close to the book value of C-Finco implying that Cerberus only paid 1.3x book value (see note 1 below).

Furthermore, I believe they were hoping to merge C-Finco with GMAC .   By coincidence they only paid 1x BV for GMAC (see note 2 below).  It is highly likely that they were going to merge GMAC and C-Finance (it was discussed as potential strategy for increasing value of GMAC in GMAC investor meetings). Merging 2 finance co’s can save significant costs ($millions) by reducing redundancies and benefiting from scale economies (think 2 banks merging). This new much larger auto lender could be sold to a large bank, at 2-4x book value.

It should be noted that in the Restructuring Plan filed, there was an industry consolidation section. It was done by JPMorgan per acknowledgment on slides. JPM has banked the C deal from the start, having been a primary M&A banker and lender to Cerberus. JPM is also the owner of Bear Stearns who was another big proponent of deal. This section highlights how consolidation of GMAC-CFC would be positive, positive for Cerberus as still 100% owner of CFC and 33% owner of GMAC. Bailouts of both these co’s are still benefiting Cerberus who has not put one new dollar into these co’s since the bailout began.

Notes:
1. C-Finco book value was derived from: typical finance companies such as GMAC or FMCC are structured with assets equal to 8-10x equity or in C-Finco’s case about $40 bil.
In this case, it looks like Cerberus paid only 1/4th of book value but if you assume they valued C-Auto at close to zero given the huge OPEB liability for healthcare, then the total value spent on C-Finco was $6.45 bil or 1.4x book value (assuming 8x equity ratio).

2. Cerberus and GM paid $14.5 bil for GMAC.  Cerberus paid $7 bil to GMAC and GM retained a 49% interest valued similarly even though no cash left GM.  GMAC’s mortgage business, Rescap, had a $7 bil BV and GMAC’s auto loan business had a $7.5 bil BV. Of course if your book value is overstated due to pending problems with your assets (i.e. loan charge-offs) that means you might have overpaid. That is exactly what happened with GMAC.  

Cerberus investment structure:
The argument that they put more money in is valid, but most likely would require either additional money from Other Investors or special permission for its own fund investors. Nardelli and others reasoning is flawed.
Cerberus Institutional Partners IV fund (CIP4), closed in ’07 equal to approx. $7 bil. This fund invested approximately $1-1.5 bil in both GMAC and Chrysler. Some of the investors in this fund are institutional investors such as Penn state teachers pension, Idaho state pension, Indiana state pension, NY common fund, Univ of Calif endowment, Univ of TX endowment, and Allstate insurance.
Est. $5.5-6 bil from other primarily distressed fund investors such as Franklin Templeton (one of their mutual funds), Avenue Capital, and others. These same funds invested a similar amount in GMAC.
Cerberus has approx. $27-30 bil assets under management. Thus they have invested approximately 7-8% of total assets or 30% of CIP4.

I found it by reading the NYTimes article that references your site and this article. I’m happy I followed the link back to your site.

As we noted on our site that covers the auto industry, the difference in detail and intended sacrifice between Chrysler’s plan and GM’s plan was glaring.

Perhaps Fiat Group should find another partnner…

B Moore – autosavant.com

Cerebus has something to win or lose with both Chrysler and GMC. I suppose that is why they flew (hmm drove) to Washington to plead for funds together. I’m sure John Snow knew the White House was not going to let them fall.

But what about the fallout if we don’t help. They really have us over a barrel. Sorta like the ransom hold the banks are using. What a da** shame.

If so, are we setting a path to a divided world?