Tumblroth

It’s fascinating that Chrysler’s major lenders are likely going to take a $5 billion haircut on their Chrysler debt. I’m dying to know what the banks are thinking about Cerberus these days and how the whole Chrylser debacle has affected Cerberus’ reputation (not to mention its returns—if any).

What’s particularly interesting about the debt angle is that the banks were never supposed to be holding all of it, anyway. In 2007, when Cerberus took over Chrysler from Daimler, JP Morgan, Goldman and Citi committed to funding $62 billion worth of debt. It was the largest loan offering in history. But when the banks started trying to resell it — as is common practice — they did so just as the credit bubble popped. No one wanted the debt, or at least not unless they got it at a steep discount.

For Cerberus’ secretive founder, Steve Feinberg, this was a major embarrassment. He turned Cerberus from a distressed debt player into a major private equity powerhouse by playing nicely with the banks. Back in 2007 I was working at Conde Nast Portfolio (alav hashalom) and snuck in accessed a closed conference Cerberus was putting on for its investors. The lightly mustachioed Feinberg gave a rare talk, during which he said:

“We get our fair share of well priced deals, even in a strong market. We are among investment banks biggest clients. We’re honest with them and don’t try to maneuver them. It’s tempting to reprice [deals], but that can hurt you because repricing is something looked at time and time again when you’re trying to fund a deal. There are some great private equity firms out there – I’m not saying we’re better, but we’re different and not as slick or maneuvering, but more straightforward.

The gist was that investment bankers would do any deal Feinberg wanted them to do because Cerberus comes in, offers a good deal, doesn’t squeeze them, and then pays out. None of that happened with Chrysler, Cerberus’ largest investment. So how are the banks reacting now—and will their memories be short when the economy turns around? I’d also love to know whether it’s possible that Cerberus came out of this OK. They put up very little of their own money (though they did end up taking on some of the debt when the banks complained).

My Portfolio story was titled The Most Dangerous Deal in America. It turned out to be especially dangerous for Cerberus. I’d love for someone to get inside that shop now.