Steve Feinberg made a fortune in distressed investing during the early 1990s. So, when the financial system fell to pieces over the past couple years, it should have boon for his private equity firm, Cerberus.

Not this time. In fact, the New York Times has an extensive piece on the topic, covering Feinberg's folly on the buyout of Chrysler.

Yes, the deal was struck about two years ago, when the private equity market had reached its peak. Debt was easy to get. And, Feinberg thought that there would be lots of opportunities to slash costs (which is easier when a company is private).

GMAC finally got its wish. It has been designated a bank under federal rules, the same rules that transformed Goldman Sachs (NYSE: GS) from being an investment house to being a commercial banking operation.

Now, like the other companies with the new designation, it can go, hat in hand, and beseech the Treasury to give it money. According to Reuters, "analysts estimated GMAC might be seeking loans of more than $6 billion." The government could also be asked to back new debt issues from the firm.

GMAC is in both the car loan and mortgage businesses. It may be a stretch to figure how it gets in under the commercial bank rule set up by the Fed. But, there is a more disturbing angle to the story. GMAC is majority owned by Cerberus, just as Chrysler is. The bailing out of Detroit is beginning to look like a bailing out of Cerberus, which by most estimates has over $25 billion under management.

Maybe tax payers should get a controlling ownership of the hedge fund that they are keeping afloat.

Douglas A. McIntyre is an editor at 247wallst.com.

Cerberus, the fund that owns the majority of Chrysler and has made other investments in Detroit, is blocking year-end withdrawals from one of its funds. According to Reuters, "Cerberus plans to suspend year-end withdrawals for up to one year, founder Stephen Feinberg said in a letter to the investors of the fund." The firm will allow investors to take 20% of their year-end withdrawals out in cash, but that's it.

Obviously, Cerberus is being badly hurt by its investment in Chrysler and may get none of that money back if the company goes bankrupt or a government investment wipes out the car firm's obligations to its parent.

That raises the question of how much trouble Cerberus is really in. It has $27 billion in assets under management but it has put money into GMAC which is having trouble due to car and home loans. It could lose part of that money as well.

Cutting withdrawals from its funds may be a signal that other Cerberus investments have gone south. If matters get worse, it may end up being one of those fund groups that simply ends up liquidating itself and sending investors cents on a dollar. In this environment that is happening a lot. The Cerberus investments in Detroit may turn out to be its undoing.

Douglas A. McIntyre is an editor at 24/7 Wall St.

Will our 43rd president help the auto industry fend off the threat of bankruptcy? No. Over the weekend, General Motors Corp. (NYSE: GM) and Chrysler owner, Cerberus Capital, tried to get $10 billion of the $810 billion bank bailout bill to help finance their merger. Yesterday, Bush turned down the request. While Barack Obama supports help for the auto industry, John McCain does not. And since no reason was given for the turn down, we are free to draw our own conclusions for Bush's decision.

I think the case for not bailing out the auto industry has been severely weakened by the decision to bail out Wall Street. After all, if it's OK to give our money to the executives of big banks that got us into the financial crisis so they can pay themselves multi-million bonuses, there is no meaningful reason why everyone should not get a bailout.

I think that GM and Chrysler got themselves into their current mess by continuing to push gas guzzling, but highly profitable, minivans and SUVs rather than investing the profits in fuel efficient vehicles. And the industry has already gotten approval for $25 billion in loans to pay for fuel efficient vehicles that it should have built with profits earned during the boom years.

Chrysler has elected to suspend talks with Renault and Nissan about a three-way global auto company hook-up that would have saved the American company personnel and production costs. Chrysler will stake its future on a deal with General Motors (NYSE: GM), which means it may have no future at all.

According to The Wall Street Journal (subscription required), Chrysler's controlling shareholder, Cerberus, wants to put all of its energy into the deal it believes is most likely to close.

The decision is hard to understand. GM has indicated that it cannot finish a deal without $10 billion from the Fed to handle worker severance and costs associated with a consolidation of the two companies. It appears that the Administration has turned this down and punted it to the next president.

On paper, the GM deal makes more sense. A buyout would create one U.S. company with about 35% of the American market. A total of 30,000 or 40,000 jobs could be taken out.

What almost every analysts is asking is why Chrysler would tie its future to GM, which could run low on cash itself sometime around the middle of next year.

The answer to the question is simple. No one wants Chrysler except, possibly, GM. The number three U.S. car company is worth more in pieces than as a whole. That would give vultures an opportunity to sift through the wreckage for the best pieces and avoid taking on any of the company's liabilities or a battle with Cerberus over who owns what.

Douglas A. McIntyre is an editor at 247wallst.com.

Will a marriage occur between General Motors (NYSE: GM) and Chrysler? According to industry scuttlebutt, talks have been going on for several weeks, but have been held up partially because of the credit crunch. Today in the Wall Street Journal, a source familiar with the talks reported that talks were proceeding at a "measured pace" and that Cerberus, the private equity firm that owns Chrysler, would want to breathe "fresh air" into the management team of the combined company.

The only member of the two current management teams who could possibly be considered "fresh air" would be Robert Nardelli, much-maligned former CEO of Home Depot and now-chief of Chrysler. He's been in the spot for a little over a year, the sum total of his auto experience. The two most likely candidates to head the combined entity at GM, CEO Rick Wagoner and COO Fritz Henderson, have each been with GM for decades (Henderson was even born in Detroit) and can hardly be considered new blood.

Bringing an outsider into a merged company would certainly create change, though it's hard to know who Cerberus has in mind. The firm's own staff is filled with onetime Fortune 500 executives, including former Johnson & Johnson COO Jim Lenehan and former MCI president and COO Tim Price. My money's on Price, who worked actively on the GMAC deal and thus has deep experience with the industry. Who else could Cerberus be considering for this historic amalgamation of American autos?

Since filing for bankruptcy in July, Mervyn's has been closing stores and fighting for survival in a much-smaller form. But now the company has announced that it will close its 149 remaining stores, with going out of business sales set to begin shortly.

In a press release, CEO John Goodman announced that "We are disappointed with this outcome but the Company's declining liquidity position and the extremely challenging retail environment, together with the fact that we have exhausted all other possibilities, requires that we take this action."

The company was taken private by a group including Cerberus and Sun Capital back in 2004, and that deal is now the subject of considerable controversy. Last month, the bankrupt company sued its former owners, alleging that the deal was structured to separate the operations from the real estate, and that the private equity owners then proceeded to sell real estate, pay themselves dividends, jack up lease payments, and essentially transfer value from the chain to the private equity buyers.

It remains to be seen what will come of that lawsuit but, if it goes to trial, it will be an interesting case that looks at the role of private equity in the financial world.

GMAC, the former lending arm of General Motors Corp. (NYSE: GM) has hedge fund Cerberus as its largest owner. GM still has a piece. Now, the financial firm has begun to undermine the fortunes of the car company that created it to give car loans to its customers.

According to The Wall Street Journal (subscription required), "GMAC LLC, the big home and auto financing company, this week began restricting new loans to the most credit-worthy buyers after an attempt to raise new funds failed. The move threatens to crimp General Motors Corp.'s U.S. sales, forcing the struggling auto maker to push its potential buyers to other lenders." Those "other lenders" are mostly banks, who do not want to give car purchasers any money either.

GMAC's problems are, to a large extent, because of its mortgage lending operation, but that hardly matters to GM, which is losing $1 billion a month on its North American operations. GM's unit sales are running off 20% or better compared with last year.

The Wall Street Journal reported that (subscription required) General Motors (NYSE: GM) had has merger talks with Ford (NYSE: F) as well as Chrysler. The Ford deal would make more sense. Together, the two largest car companies would have 36% of the American market. There would be no reason for the needs of a private equity firm, in the case Chrysler owner Cerberus, to be served.

While many people do not realize it, the Fed can make capital available to institutions outside the banking system if it believes that their problems could have a dire impact on the economy. By most measures, Ford and GM have enough money to make it to the second half of next year. The Fed could provide capital to stretch that well into 2010 when many analysts think that they worldwide auto industry will begin to recover.

While there may not be huge savings in putting the two largest U.S. car companies together, they could improve margins by closing some of their poorest performing brands.

Better that the government provide capital to one combined company than two smaller ones.

Douglas A. McIntyre is an editor at 247wall st.com.

It probably made sense and has for at least a year. General Motors (NYSE: GM) and Chrysler have had merger talks, and probably had them recently. The largest car company in the U.S. has been speaking with Chrysler's owner Cerberus.The conversations may have been slowed by the wild stock market.

According to The Wall Street Journal (subscription required), "Uniting two of the country's Big Three auto makers would prove a watershed for an industry knocked down by high production costs and a looming recession."

But the plan may not work. GM and Chrysler both appear too weak position to weather the bad economy, even together. Analysts believe that GM will be low on money next year, and Chrysler is no better off.

What would make sense is that Chrysler makes a good merger partner for Honda (NYSE: HMC) or VW. Both would like a larger market share in the U.S. Both have strong balance sheets, and both could rip out duplicate costs.

Putting together two troubled U.S. auto operations gains very little for either company.

Douglas A. McIntyre is an editor at 247wallst.com.

The Wall Street Journal reports (subscription required) that General Motors (NYSE: GM) was recently in discussions to acquire Chrysler from Cerberus Capital Management, the private equity firm in the unpleasant position of owning that train wreck.

Once you learn the details, it's not quite as dumb as it sounds at first. According to the Journal, "Cerberus proposed a swap in which GM would acquire Chrysler's automotive operations, and in turn give Cerberus its remaining 49% stake in GMAC."

Given what a mess GMAC is, the proposal provides an idea of what Cerberus thinks of Chrysler's long-term prospects. It's a little bit like a few college students trying to trade 98 Degrees CDs for Dawson's Creek posters.

It's pretty much moot because the events of the past week have made a deal of this size impossible to put together, at least for now. But it's still interesting to think about. Given what a dump GM is, it's hard to imagine that an acquisition of this size and complexity would help matters. CEO Richard Wagoner (seen at right mulling the merger) already has his hands full.

GM insists that bankruptcy is not on the table. But so does every company -- until it files.

One of the most common complaints about private equity companies (and activist investors, corporate raiders, etc.) is that their relentless focus on making a quick profit results in the looting of companies, job losses, and so on.

That theory will be tested in court: Mervyn's LLC has sued its former private-equity owners -- including Cerberus and Sun Capital -- alleging that their profiteering tactics led to the chain's bankruptcy. When the $1.26 billion deal was consummated in 2004, The Wall Street Journal reports that (subscription required) "the deal was structured as two separate transactions -- one for the retailer and a second one for the retailer's real estate. This complicated structure, the suit alleges, enriched the private-equity firms while leaving the retail operations insolvent."

The firms then sold off real estate, paid themselves dividends, jacked up lease payments, and essentially transferred value from the chain to the private equity buyers, according to the lawsuit.

This will be a must-follow case -- assuming it isn't settled quickly and confidentially -- for those looking to understand the larger effects of buyout shops. I'm skeptical of the notion that private equity firms destroy companies and, if that was indeed the case with Mervyn's, it may have been a result of the complex structure and self-dealing.

In most cases however, there is little money to be made bankrupting something for which you pay hundreds of millions -- or billions.

TheStreet.com's Jim Cramer says the only action in the sector is that the rumor mill is spinning overtime.

There are tons of ridiculous stories that can be written in the Naked City. Notice that every day we are blessed with a story about how there are three private-equity firms examining Lehman Brothers (NYSE: LEH) (Cramer's Take) and Neuberger Berman (NYSE: NEU) (Cramer's Take). I think I have read that story a dozen times now.

You can list them, too: Blackstone (NYSE: BX) (Cramer's Take), KKR (NYSE: KFN) (Cramer's Take), Apollo (NASDAQ: AINV) (Cramer's Take), maybe Cerberus. What are they going to do, deny it? "No, we are not looking at it?" Their investors would love that: "Well what the heck are they doing with our money?" would be the reaction of investors if they issued denials. I predict weeks more of phantom tire-kicking of Lehman by nonexistent private-equity firms.

How about private equity about to swarm over collateralized debt obligations? Usual cast of characters there. Right? Come on, those stories are a penny a dozen. Every day I read about them. But nobody, other than Lone Star, is doing anything, anything at all on this front. If there were buyers, you can bet that Lehman and AIG (NYSE: AIG) (Cramer's Take) wouldn't be in the woods, lost, hopeless, with tons of bad European paper.

Sometimes, it's hard to determine if major investors are being overly optimistic, outright daffy, or are simply seeing something that the rest of us just don't see.

In my view, the current course of events at Chrysler Corp. is one of those difficult to determine situations. On its face, it looks like it could be a case of basic business logic in action. But on closer examination, it just doesn't make sense, at least not to me.

Declaring a payoff horizon of ten years, Cerberus Capital Management has placed a great deal of faith in Chrysler, the American auto manufacturer which is best described these days as an also ran. The kicker is, the Cerberus ten year plan is being initiated at a time when auto industry profitability is near impossible. Consider also the fact that current Chrysler management openly admits that the company isn't in any condition to go it alone.

And there's more trouble in the mix. Cerberus said in a New York Times story that Chrysler is meeting "every financial metric." But Cerberus considers the world's current economic turmoil to be a temporary problem, not the economic world change that it actually is. Meanwhile, Chrysler CEO Bob Nardelli is smiling because Cerberus has given Chrysler lots of money, and he gets to cut heads.

In the midst of an ailing US economy in the early 1990s, Cerberus Capital Management, L.P. got its start. And yes, the firm found many undervalued opportunities – and made a bundle. Actually, today Cerberus has holdings with aggregate annual revenues in excess of $100 billion.

So, in the current environment, Cerberus should be doing fine, right? Not necessarily. According to a story in Bloomberg.com, Cerberus's latest fund – called Series Four -- is down 1% since November 2006.

And it makes sense. If anything, Cerberus has been early in a variety investments. It also looks like the firm has diverged somewhat from its core-value approach.

Oh, and of course, Cerberus invested in iffy deals like Chrysler LLC and GMAC LLC.

True, Cerberus does take a disciplined approach to portfolio allocation – with no more than 5% of a fund in a particular deal.

However, such amounts can still be material – especially in a low-return environment. After all, there is still little clarity in the auto and mortgage markets right now.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.