Investments Are Faltering in Chrysler and GMAC

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Mr. Feinberg’s giant investment fund, Cerberus Capital Management, is
racing to salvage multibillion-dollar investments in Chrysler, the
smallest of the Detroit automakers, and GMAC, the financing arm of
General Motors.

But for Cerberus, named after the mythological three-headed dog who
guards the gates of hell, the news keeps getting worse.

On Wednesday, Chrysler, which owns the Jeep and Dodge brands, said its
sales in the United States fell by a third in August — nearly twice
the industry average — as the downturn in the auto business dragged
on. Honda eclipsed Chrysler as the nation’s No. 4 seller of cars, and
Nissan is closing in fast.

The same day, GMAC, in which Cerberus holds a 51 percent stake, said
it was trying to stanch the bleeding from a business that was supposed
to be immune to the ups and downs of the car industry: home mortgage
lending. GMAC and its home loan unit, Residential Capital, announced
that they would dismiss 5,000 employees, or 60 percent of the unit’s
staff, and close all 200 of its retail mortgage branches.

It is quite a comedown for Mr. Feinberg, who founded Cerberus in 1992
with $10 million and was initially hailed as a savior at Chrysler.
Over the years, Cerberus excelled by gaining control of companies in
bankruptcy and nursing them back to financial health.

Now, Mr. Feinberg’s purchase of Chrysler and his deal for GMAC have
knocked Cerberus down a peg.

“Early on, in the Cerberus deal for Chrysler, when it first did these
auto industry investments, the story was about how big and influential
these funds are, that they think they can buy these iconic industrial
companies,” said Colin C. Blaydon, director of the Center for Private
Equity and Entrepreneurship at the Tuck School of Business at
Dartmouth College. “So far, it does not seem to be working out well
for them.”

Chrysler is still recovering from its split a year ago from its German
partner, Daimler, and is undergoing a big revamping under Cerberus.
Top executives at Cerberus have said they are determined to fix the
company and that their $7.4 billion investment will pay off.

A Cerberus spokesman said in a statement on Wednesday that it remained
confident in its management of Chrysler and GMAC. “No one is pleased
with current market conditions,” he said. “However, Cerberus is a
patient investor and not a market timer, and we take a long-term view
of our investments. Our funds are structured accordingly.”

Mr. Feinberg hired Robert L. Nardelli, the former chief executive of
Home Depot, to turn Chrysler around. Their plan hinges on new
offerings beginning in 2010.

Since Cerberus acquired Chrysler, the automaker has been trying to
squeeze out costs. It has announced the elimination of 28,000 jobs and
sold $500 million worth of assets. Last week, Chrysler announced that
it was studying a sale of its Dodge Viper sports car business.

But like its larger competitors, General Motors and Ford Motor,
Chrysler has faced questions over its ability to ride out a downturn
in American auto sales that is expected to stretch through 2009. All
three Detroit automakers have been hit hard by the sharp decline in
sales of pickup trucks, sport utility vehicles and vans that followed
the rise in gas prices this year.

Chrysler, which has released limited financial data since Cerberus
bought it, ended June with $11.7 billion in cash and had earnings
before interest, tax, depreciation and amortization of $1.1 billion in
the first half of the year. But with limited access to financial data,
some analysts are skeptical of its overall health.

The news on Wednesday from GMAC, meantime, underscored that Cerberus
also must contend with the housing slump, which has led to huge losses
at lenders across the spectrum. That includes Residential Capital,
which became one of the nation’s biggest mortgage providers and
plunged into the market for riskier home loans that could not be sold
to Fannie Mae or Freddie Mac, the mortgage finance giants that have
run into trouble themselves. Now, many of those loans are defaulting
as home prices fall and the economy weakens.

This summer, Residential Capital and its bondholders restructured $14
billion in bonds to ease its debt burden. That restructuring and new
loans from GMAC have bought the company time to work out its problems,
but analysts say it may not be enough to save the firm from rising
defaults on mortgages. Residential Capital bonds are trading at about
70 cents on the dollar.

“They have some time,” said Andrew Feltus, a bond fund manager at
Pioneer Investments. But, he added, “This environment is going against
them.”

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