The Whiz Kids of Cerberus

Their fingerprints are all over Chrysler, Tower, GMAC, and more. But little is known outside of their notoriously tight-lipped Park Avenue headquarters. A look inside the mysterious entity that is Cerberus Capital Management

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There’s a popular canard among Detroit’s many critics that the auto industry can sell anything just by flexing its marketing muscle — never mind the Edsel or its more recent equivalent, the Pontiac Aztek. But as employees and media gathered in the auditorium at Chrysler’s sprawling corporate headquarters on an early August morning in 2007, that truism was about to be put to the test.

Only a few months earlier, the long-struggling automaker had been unceremoniously jilted by its one-time partner, Daimler AG. The “merger of equals” had collapsed, unceremoniously, with Chrysler being sold, at a sizable loss, to Cerberus Capital Management, and though John Snow, the former Treasury Secretary and now chairman of the New York private-equity giant, was promising to practice “patient” capitalism with the sickly automaker, Cerberus was a company best-known for hunting down the quick score, rather than the nurturing acquisition.

As the sale was about to be finalized, Cerberus’ sincerity was being stretched even thinner by the news of the day. In the preceding weeks, the Chrysler rumor mill was overwhelmed by the debate over who would take charge of the automaker. Far and away, the favorite choice was Wolfgang Bernhard, the one-time chief operating officer under German control. Smart, dapper, and an avowed aficionado of Chrysler products, he had been spotted prowling the Chrysler Technical Center and was rumored to have locked down a lucrative new contract. Just the evening before the Monday morning news conference, Chrysler’s normally well-connected public relations department was making the final tweaks to a presentation introducing Bernhard.

But in the hours before the conference began, the team, led at the time by the ever-resilient Jason Vines, realized they were going to have a far bigger sell job than they might’ve imagined. Bernhard wasn’t anywhere near Detroit. And he wasn’t going to be. In a last-minute shuffle, the German executive was brushed aside, Cerberus instead extending the contract to Bob Nardelli. Characterized as aloof and, at times, irritable, Nardelli was the one-time heir apparent of GE’s legendary Chairman Jack Welch. But when he was unceremoniously bypassed, Nardelli packed up and moved on, landing at Home Depot. Despite a strong initial performance, sales eventually tumbled, along with the big-box hardware chain’s stock price, and Nardelli was ousted — with a mind-bending $210 million compensation package as his consolation prize.

“We knew we were going to have a tough challenge making this look good,” recalls one of several Chrysler PR officials who’ve left, in frustration, since the Cerberus acquisition. Yet, early on, the smoke, mirrors, and pixie dust seemed to work much better than expected. After some initial coverage that focused on the wrath of Home Depot stockholders over Nardelli’s parting bonus, he began to receive some unexpectedly good press. It helped that Chrysler had just won a breakthrough contract from the United Auto Workers union, which promised to radically improve its financial situation. Even some of the CEO’s initial moves to cut production, trim plants, and reduce the workforce were hailed as the much-needed steps of a no-bull leader determined to nurse Chrysler back to health and prove Cerberus was, indeed, a patient and willingly entrenched player in the challenging automotive world.

It helped to know that Chrysler wasn’t the only bet the New York firm was making in the industry. Over the past few years, Cerberus had plunked down billions in hard cash on an array of transportation industry investments, including bus manufacturer Blue Bird and a number of aftermarket parts manufacturers. In Michigan, one could feel the equity firm’s presence in a variety of quarters, notably Tower Automotive, a supplier best-known for producing frames and other big, bent metal parts for OEMs such as Chrysler. Snow and company had even made a bid for the bankrupt Delphi Corp., though it fell through at a late hour. Closer to its core competency, Cerberus also purchased a controlling 51 percent stake in General Motors’ captive finance subsidiary, General Motors Acceptance Corp., which made it one of the nation’s larger lenders in both the home and automotive markets.

In a curious way, notes David Cole, chairman of the Center for Automotive Research in Ann Arbor, Cerberus seemed to be following the model laid out nearly a century earlier by William Crapo “Billy” Durant. The one-time Flint buggy manufacturer transformed an assortment of small automakers and parts makers into what would become the world’s largest automaker, General Motors Corp. In the early years, that “vertical integration” made unarguable sense. Henry Ford had followed a similar model, though growing organically. In its heyday, his Rouge River complex took in sand, iron, and coal at one end, and spat out fully assembled automobiles at the other. In recent decades, the concept had been discarded, in large part to shift costs away from the OEMs. But Cerberus managers were often quick to boast that they knew a better way to do business. Might they be proving that in Detroit? And might they really be ready to stick around, rather than grab for the quick buck?

The Reluctant General

Cerberus? The equity firm was named after the three-headed dog that, in both Greek and Roman mythology, guards the gates of Hades. Considering the current fiscal crisis, especially the meltdown at Chrysler, it soon seemed an inadvertently apt moniker. Yet for investors who’d bet big on Cerberus in earlier days, the firm often seemed heaven-sent. Though it’s been known to walk into some hellish situations, Cerberus developed a reputation — make that a legend — for finding ways to routinely turn around distressed companies and deliver returns that often ran 20 percent or better.

The company was founded in 1992 by Stephen A. Feinberg, the Bronx-born son of a steelworker, who graduated from Princeton and originally aspired to a career in politics. But there was just one impediment to his avocation: Feinberg is notoriously publicity-shy — to the point of paranoia. In fact, since Cerberus was formed, he’s granted a total of one interview — to The New York Times — and has participated in only a handful of news conferences, including one marking the acquisition of a 51 percent stake in GMAC. Lest one think he’s simply too busy managing his money, Feinberg wrote a letter to his investors last February, complaining that, “We despise all the public attention we are getting.”

Feinberg quickly demonstrated a magic touch with money, first as a trader at the legendary junk bond firm, Drexel Burnham Lambert, then as a player in the dog-eat-dog distressed debt market and, finally, partnering with fellow financier William L. Richter to form Cerberus. In 1992, the pair had a grand total of $10 million under their management. In recent years, Feinberg’s annual compensation has run significantly larger than that — and while he prefers a frugal lifestyle that includes drinking domestic beer, driving an old pickup, and taking weekend hunting trips, it’s at odds with reality. In 2003, Feinberg and his wife, Gisela, bought a four-story townhouse on East 67th Street in New York for $19.75 million, but according to a report in The Wall Street Journal, after five years the remodeling costs went from an estimated $5 million to $15 million. Further, the Feinbergs’ feuds with contractors became the stuff of legend, even by New York standards. But one place Feinberg is loose with the checkbook is in his support of the Republican party, an affiliation that has proved useful in numerous ways.

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