October 29, 2008 11:32AM

The Cerberus Bailout

By Ray Hennessey

The Wall Street Journal reported today that GMAC may convert to a bank holding company so it can line up to collect some of the $700 billion in federal bailout money. Fair enough, given that, a) it is a lender like a bank,  b) is in enough trouble financially where it could use the cash, and c) is certainly eligible, given that Wall Street firms like Goldman Sachs and Morgan Stanley have made the same conversion.

But this story isn't so much about GMAC as it is about private-equity firm Cerberus. Cerberus co-owns GMAC GM and also owns GM rival Chrysler. GM and Chrysler have been talking about a merger, and the terms that have leaked out have GM buying out Cerberus from Chrysler and Cerberus getting a bigger piece of GMAC.

If GMAC gets the funding, it gets stronger, so Cerberus makes out well. If that paves the way for a GM-Chrysler hookup, Cerberus makes out well. So, while Cerberus doesn't have its handout, it gets to put the cash in its pocket.

Some may say, "So what?" Indeed, everyone seems to have his hand out nowadays.

Well, Cerberus shouldn't, because it should have been smarter. After all, private equity is supposed to be the smartest of the smart money, and it's traditionally a helluva lot more patient with its investments. But it screwed up: Chrysler is in rough shape, and GMAC is, too. Two very bad investments.

Here's a solution: Let the government become a partner in Cerberus. Socialist? Maybe. Fair? Certainly. Private equity is a notoriously exclusive club. Most folks never get passed the porter in the hall. But, if the bailout will benefit Cerberus, then why not let the source of the bailout funds -- that's us, taxpayers -- get a nice table in the clubhouse. After all, in good times the returns from PE are pretty damn good.

Obviously, that won't happen. Cerberus would never dream of letting Treasury become a partner, as dozens of banks are doing by offering the government preferred shares in return for bailout cash.

But, if they're not willing to give something up, they shouldn't be showing up at the government's money trough.