Chrysler at the gates of hell

A three-headed dog whose job was to keep anyone from escaping Hades plans to rescue the car company from German control. Could there be a worse metaphor?

Published May 14, 2007 5:34PM (EDT)

If Daimler-Benz's "merger of equals" with Chrysler nine years ago was a globalization gut-check for Detroit, then the news today that Cerberus, a New York private equity firm, is buying the car company back from German control is a return to good old-fashioned American-style capitalism. Because, really, what's more classic, Wall-Street style, than a distressed company being bought by new owners who most likely intend to cut costs dramatically in a coldhearted effort to boost profitability? Gordon Gekko, there's a call for you on line 3.

Sure, Cerberus is saying that such a strategy is not its goal, but come on, this is what companies like Cerberus do. Cerberus' mandate is to maximize return on investment, not to make cars, provide employment in Michigan, or painstakingly live up to Chrysler's huge ($19 billion!) healthcare and pension liabilities. Here's my bet: This is just the first step in a sequence that will end up with Chrysler's various assets divided up by hungry new upstarts in the car world -- can anyone say Shenyang Brilliance Jinbei? Or Tata Motors?

The UAW's Ron Gettelfinger is on board: "The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group, and Daimler." His praise surprised many analysts who noted that he had previously been a strong critic of any private equity firm purchasing Chrysler. But maybe he's just recognizing reality. As the Wall Street Journal observed: "The auto maker has already installed a plan to cut 13,000 jobs, cut shifts at plants and close an assembly plant in order to facilitate a comeback." What could Cerberus intend that would be any different?

There is, however, one part of the package that Cerberus may intend to keep -- Chrysler's financial services wing. Cerberus already owns 51 percent of GMAC, the lending arm of General Motors. Combining the two creates a car-loan powerhouse (along with some subprime liabilities, which Cerberus probably wasn't banking on when it made the original deal with GM).

You have to wonder what Cerberus knows that we don't, though. Calculated Risk points to an interesting story in today's Chicago Tribune reporting that new car sales in the United States declined by 3 percent in 2006 and are on pace to decline by a similar amount this year. The reason? Car buyers have stretched out their loans over such long periods of time, in search of low monthly payments, that they no longer can easily afford to upgrade.

"They would like to trade, but they can't. They have no equity," said Art Spinella, president of CNW Marketing Research, which studies consumer buying trends.

Three out of five new-vehicle loans made this year, or 60 percent, are for 61 months or longer, and nearly 20 percent are for longer than six years, according to a Consumer Bankers Association study. Some go as long as 96 months...

As loan contacts have lengthened, so has the amount of time that consumers keep new cars. CNW says the average buyer keeps a car 59 months, up from 50 months in 2001. Most buyers would still like to get a new car every four years or sooner, Spinella said, but now fewer can afford to.

Sales are down and car buyers are stressed. Doesn't seem like the best possible time to bet on the synergistic powers of merging Chrysler's and GM's loan divisions. But Cerberus, which currently owns some 50 companies whose combined revenues add up to around $60 billion, doesn't have a reputation, yet, for dumb moves.

As a final note, there appears to be a requirement that press coverage of Cerberus includes the phrase "Named after the mythological three-headed dog who guarded the gates of Hades." The idea being, I guess, that Cerberus guards its investments with similar passion. But we should remember that Cerberus was not invincible. Orpheus sang him to sleep. Psyche knocked him out with drugged honeycakes. Hercules wrestled him into submission.

That fight, apparently, was so fierce that when Cerberus' saliva hit the ground, it instantly transformed into the deadly aconite, or wolfsbane, a poisonous plant that thrives in rocky, inhospitable terrain. Poison drool! Now there's a metaphor Gordon Gekko would love.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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