The Spark

“The emancipation of the working class will only be achieved by the working class itself.” — Karl Marx

Private equity:
Burying a company in debt to enrich a few speculators

Jan 21, 2008

Almost as soon as Cerberus, the private equity company, bought Chrysler last summer, it rushed to take out big loans – in Chrysler’s name.

But it ran into big problems. Chrysler’s bankers, Citigroup, J.P. Morgan Chase and Goldman Sachs, have been trying to sell the first eight billion dollars in Chrysler debt that Cerberus wanted to float. But they have yet to find any takers.

Last August, when Cerberus completed the purchase of 80% of Chrysler Motors from its old parent, Daimler-Benz, it was part of the biggest corporate merger and buyout boom in history. From 2004 to mid-2007, deals worth more than 13 trillion dollars were struck, the equivalent of the annual U.S. gross domestic product, the total production and services of the single biggest economy in the world.

Of course, the biggest beneficiaries of this corporate buyout boom were the private equity companies like Cerberus, which snapped up one company after another. To buy up the companies, they relied on money they borrowed from big commercial and investment banks. But responsibility for repaying these loans did not rest with the private equity companies like Cerberus, but with the companies they bought up, like Chrysler.

They then borrowed even more money, in order to cover what they called a “special dividend.” This “special dividend” was nothing but an instant profit that private equity companies paid out to their biggest investors and their own officials. According to Standard and Poor’s, the volume of these special dividends increased from 3.9 billion in 2002 to 40.5 billion in 2005.

All this was financed by an explosion in debt. Commercial and investment banks made enormous amounts of money not only by providing the financing for the corporate takeovers, in the form of loans and bonds, but by then bundling and distributing these loans to investors, and then speculating on these loans.

In other words, the banks and financial houses financed the corporate takeover boom, just as they financed the real estate boom and the creation of subprime mortgages.

Then, last July, the whole financial house of cards began to tremble. The fall in real estate prices led to mushrooming defaults in home mortgages. As financial markets worldwide began to report big losses, financial markets for other forms of loans suddenly froze up. This included funding for corporate takeovers.

Cerberus’s purchase of Chrysler was one of the last big deals to go through. But even then, the three big banks that had signed contracts to market 60 billion dollars in bonds for Cerberus, couldn’t sell most of these bonds.

Chrysler management has taken it out on the workforce, first of all, by imposing a new contract filled with enormous concessions on its unionized workforce. At the same time, the company has cut 23,000 positions – cutting production and outsourcing more and more of its work to slash wages.

And for what are all these sacrifices? To bail out a bunch of money mad speculators who buried the company in debt in order to funnel even more money into their own pockets and add to their own already outrageous fortunes.