Neurological Correlates

The X shaped desk .
This desk, once the centerpiece of Drexel at Beverly Hills, should be the symbol of the era of the total scamming of the financial systems.*

X-Shaped Desk, Drexel Burnham, Beverly Hills

We know about  Joseph Cassano, the AIG financial products guy, who wrote credit insurance without actually having an insurance company.   Mr. Cassano cut his teeth at Drexel Burnham — fruit off the poisonous Drexel tree so to speak.

And now there is another such poisonous fruit, Mr. Steve Feinberg, a Drexel alum from the early to mid 1980′s. Mr. Feinberg founded Cerberus Capital — a private equity group. As far as I can tell, Cerberus Capital is a spectacular failure and one of the biggest recipients of corporate welfare in the history of bailouts.

Cerberus bought out Chrysler in 2007, presumably for access to capital held by GMAC, a financial services company and now a bank holding company . See the article here in today’s NYT.  GMAC took auto lease payments and leveraged them into real estate. All in all, US taxpayers paid GMAC  $12.5 Billion and paid Chrysler around $14.9 Billion.  USN.

Looking at Cerberus’s Muckety Map it looks like a who’s who’s of bad financial risk taking — J. Ezra Mirkin (a Madoff conduit) is on there too.  Dan Quayle is a ranking officer of Cerberus, so you get the drift.

Backing up,  Mr. Paulson, our former Sec’y  of the Treasury, isn’t the only one with ethical challenges for the appearance, at least, of preferential treatment of his BFFs at Goldman. Mr.  John W. Snow, Mr. Paulson’s predecessor at Treasury has been pretty quiet lately.  Hm.

Mr. Snow, a former Reagan-era de regulation proponent, left Treasury to become Chairman of the Board of  (wait for it. . .) Cerberus Capital Management. Mr. Snow was secretary of the treasury when the capital cushions for investment banks were lowered, so that investment banks could have a debt to capital ration of a gajillion to one.  This was done via Mr. Levitt at the SEC at the time in 2004, for the Worlds Best Banks, or about 5 or so of the I banks who believed they were entitled. I digress. He was also a member of the Commission on Public Trust and Private Enterprise a group that reported that compensation consultants, paid by their clients, were of course going to conclude “you don’t get paid nearly what you’re worth.”

To buy Chrysler from Daimler in 2007, Cerberus tapped Goldman for $50B+ in debt financing.  See the article here in today’s NYT again, and  WSJ deal blog .  (I’ll leave Goldman alone today, I’m sure there’s a Goldman Chris Crocker out there somewhere with runny mascara and blond streaks, sobbing, “Leave Goldman alone. . ” ).
Mr. Snow, in charge at Cereberus, appointed Mr. Nardelli to run Chrysler — the Mr. Nardelli who had run Home Depo into the ground as CEO (after he left GE, who just had several years of cookin’ the books to make the numbers according to the SEC).   Not surprisingly, Chrysler continued to fail  despite several bailouts, televised on C-Span, where auto CEO’s flew in posh private jets to ask for taxpayer funded bailouts on behalf of private equity companies. ‘Nuff said.

Chrysler went into a bankruptcy re-org, Mr. Nardelli resigned, and his successor, Mr. Rattner, was the politically appointed Car Czar.  Mr. Rattner recently also resigned for unknown reasons, speculatively related to bribing public pension officials.  It is troubling that  he took the job reportedly when Cerberus was about to foreclose on a loan to Rattner’s Quadrangle  –  making Rattner effectively the boss of Cerberus, the company ready to foreclose on Ratner’s Quadrangle.

Mr. Rattner had the easiest job in the world: pay the bills with other people’s money. Pay off Chrysler creditors on behalf of  Cerberus so Cerberus (Mr. Snow’s shop) wouldn’t be on the hook for paying the bills. Use Other People’s Money — Taxpayers. Done deal.  I don’t know if Mr.  Rattner’s debt was forgiven for this largesse with taxpayer money.

Be that as it may, Mr. Snow, the former Treasury secretary and proponent of deregulation “let the market work on it’s own” laissez-faire that led us into this royal mess has been extremely on the down low, without so much as a Greenspandix “geez, guess me and Ayn were wrong all those years.”

But it’s really GMAC that I think is so interesting.

Now, the entire thing about car companies is that they are basically financial services companies that sell a capital-intensive product.  GMAC and Goldman Sachs and others of course teamed up to take the money people paid on their auto leases and car loans, and leverage it.  So that was the real value of Chrysler, not the cars, that I’m sure Mr. Nardelli had no interest in whatsoever,  preferring jets to cars (natch).

From the NYT:

. . .According to five people who heard Cerberus’s Chrysler pitch, all of whom requested anonymity because of confidentiality agreements, Mr. Feinberg’s deputies valued the financing unit more than the auto operation. In fact, the deputies believed, the finance unit’s value covered the cost of buying Chrysler, making the car company something of a bonus — if that part of the investment worked out, great; if not, Cerberus could still profit on the finance unit.

What happened when the real estate market tanked, and consumers couldn’t pay their loan payments, and the leveraged investments went belly up? Of course this failed spectacularly.  I think this is the story:  GMAC failed because it was overleveraged due to Drexel Burnham Curse of the X-Desk.  Yet again another Drexel alum saw unregulated capital grabbed it.

So, how did Cerberus extricate itself?

Mr. Rattner, the Car Czar and Cerberus Debtor (apparently) and possible pension pay to player.  Mr. Rattner did the logical thing:  He went to the docks, stole a shipment of  Apple Computers, sold them, and paid off the debt.

Ok, I kid, but same idea: Mr. Rattner sold of the GMAC assets at a loss, gave the money to Cereberus, and gave GMAC stock to the US.   Who owned GMAC assets that were sold?  Taxpayers, having bailed out GMAC by propping it up with a big bolus of zillions of dollars when it became a bank holding company.

So Mssrs. Snow, Nardelli and Rattner took my money (representative of tax payer funds), propped up their investment in GMAC and Chrysler, sold off some of the assets, and payed me back in worthless stock, while keeping the cash and offloading the risk.

And asking for a raise: GMAC refuses the compensation czar rules for taxpayer-owned companies, and insists that it must compensate its execs to “retain talent” with 20% cash, 80% stock. This from the company that used to be owned by the guy who was on the commission that concluded compensation consultants were on the take.( The  Commission on Public Trust and Private Enterprise noted above. )

And that’s the X-shaped desk for ya.  The money goes round and round.

Just like AIG financial products division –take monthly payments (car loan, lease, insurance premiums), bundle those together, and use that as capital to invest in something else, like commercial real estate. Brilliant. Until it’s not.   Then the people who originally paid for their cars get their cars repossessed on the one end, and have to pay for the failure of the car loan company’s adventurous investments on the other.

Will anyone at GMAC even acknowledge this? No, nor does anyone over there have a gag reflex, apparently.  According to the website, they are true patriots. From GMAC web site: