Mercantilist Risk Capital

I am a supporter of markets. I am disgusted with the false arguments that have been raised in support of substituting bankruptcy for the automakers for a government bailout. Each of the big three has a story to tell but none is more fraudulent than Chrysler. Chrysler is 80% owned by a private investment firm called Cerberus. They bought it from Daimler in 2007 for about $7.5 billion.

Cerberus says they involve themselves in "risk capital" a good brief definition of that is "Funds made available for startup firms and small businesses with exceptional growth potential. Managerial and technical expertise are often also provided. also called risk capital. also called venture capital (VC)." Risk capital's inherent structure has always been that rewards can be great but so can losses.

On their website, Cerberus extolls the virtues of private markets "Cerberus specializes in providing both financial resources and operational expertise to help transform undervalued companies into industry leaders for long-term success and value creation." "We invest in undervalued companies and their people, and help them to realize their potential."
"We partner with our portfolio companies to help them become industry leaders. We believe competition makes the global economy more productive and more efficient, which enables companies to succeed long-term in the globally competitive marketplace."

"We encourage our companies to focus on the future through prudent capital investment, R&D, new product marketing, talent development, improved operations and appropriate strategic acquisitions." Note, it is hard to determine whether they actually do this because no 10-K filing is required of private corporations.

John Snow, former Bush Treasury Secretary is the CEO, he gave a speech to the National Press Club in July 2007- The speech, like a later one to the Detroit Economic Club is fraught with comments about the goodness of private equity. Here are six quotes from the speech that speak for themselves.

But now I have an insider’s view on what I believe is the best hope for restoring our industrial base in this country: the growing role of private investment in our economy.

The prescription we offer is patient capital.

Now sometimes people think of “debt” or leverage as bad. In reality, corporate debt and equity are flip sides of the same coin. Both represent positive investments that can create jobs. Debt represents the confidence of the bond markets—people don’t lend money if they don’t have the expectation of a positive return. Either way, we address underinvestment. Many of our investments like Chrysler, for example, actually de-leverage the balance sheet. (Emphasis added)

Private investment is no magic elixir, but in certain cases like Chrysler, we believe it offers simply the best hope for restoring competitiveness to sectors of the U.S. economy that need it most. And stronger, growing companies are the best way I know of to provide job security, increase employment, raise living standards – and keep America’s economy strong.

Over twenty-five years ago, when Chrysler faced bankruptcy, it turned to the United States government for assistance. Today, Chrysler again faces new financial challenges. But it is private investment stepping in to inject much needed support. That speaks volumes for the transformation of our economy. Private equity was virtually unheard of at that time. Now, Cerberus has the opportunity to use the tremendous financial innovation of private investment to turn Chrysler around, to restore it to financial success, and to help it be a continuing source of good jobs for many Americans, as well as great products for American consumers.

As a private company, Chrysler will be able to implement a plan to build longer-term value, to make strategic investments and to focus all of its energies on improving the company’s performance – all without fear of short term negative market reaction from quarterly public company reports and the pressures to meet analyst targets.

In the middle of the first tech boom, I was a major investor in a company that made modems. At one point I was one of the largest outside shareholders. The company made a pretty good product. But the market for modems was drying up and commoditizing. In the end I lost a substantial investment. But I did not go to the feds to restore the money I lost. Indeed, it took me a couple of years to write out the losses I had on my income tax. But Snow and his partners (which includes Dan Quayle) have enlisted some of the most expensive lobbyists in Washington to backstop their investment. What frauds.