Investments Are Faltering in Chrysler and GMAC

Stephen A. Feinberg, one of the country’s most powerful — and secretive — financiers, hoped to make a fortune out of the detritus of the American auto industry. Instead, he seems to be losing one.

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."