Captain looks forward to sailing rough seas

As John Snow sipped his morning coffee in a sun-filled suite at the Waldorf-Astoria hotel last Friday, the chairman of Cerberus Capital Management gave barely a hint of the changes in store at Chrysler.

“The new environment being created gives it a better prospect,” the former US treasury secretary said in a wide-ranging interview with the FT. “There is tremendous talent there. We have a number of experienced executives who can be seconded to the business and bring fresh eyes”.

On Monday those “fresh eyes” were revealed to belong to Bob Nardelli, the former Home Depot chief executive who was controversially ousted from the US retailer in January after many shareholders objected to his aggressive management style, aspects of his strategy, and high compensation.

Mr Nardelli, 59, had been in talks with Cerberus about its Chrysler plans for the past several weeks and was named chairman and chief executive of the Detroit carmaker over the weekend.

Appointing Mr Nardelli could help Cerberus counter criticism that the private equity group’s strategy for Chrysler was not particularly different from the status quo. Until Monday, Cerberus was betting solely on Chrysler’s existing management, led by Tom LaSorda, and a five-year turnaround plan that was prepared by DaimlerChrysler, the carmaker’s previous German owner.

Mr Snow, 68, predicted that a radical improvement would come relatively quickly. “I think you’ll see that Chrysler will be in much better shape within three years. This is a plan to get it back to profitability,” he said, while praising Mr LaSorda, who will remain as vice-chairman and president.

Cerberus took control of Chrysler last week, after a rough ride through the credit markets forced DaimlerChrysler and Cerberus to take on $2bn of the debt package for the deal. The investment banks underwriting the rest of the loans were left nursing significant losses.

“Nobody welcomed the change in the credit markets,” said Mr Snow. “But everybody behaved in a thoroughly responsible way, making reasonable accommodations of the sort you would expect.”

Across Wall Street, fears are growing that many of the large leveraged buy-outs of the past few months may not be completed so amicably.

Private equity groups are trying to force through deals that would leave investment banks holding massive loans on their books. Investment banks are threatening to cut off funding for future deals, potentially dealing a devastating blow to the buy-out industry at the peak of its power.

“The banks will be dealing with us for years to come and want to have relationships with us,” says Mr Snow, suggesting that the stand-off could be resolved with some cool-headed diplomacy. “We want to have them as partners.”

Nevertheless, Mr Snow is among a growing cadre of buy-out executives who believe that the “golden age” of private equity, as it was described by Henry Kravis of KKR in a speech in April, is effectively over.

“For creative private equity people this is the time for the old saying ‘you don’t test the captain until you’re sailing in rough seas,’” says Mr Snow.

Naturally, Mr Snow claims that Cerberus, which is run by Steve Feinberg, a reclusive former Princeton tennis champion, is perfectly positioned to make good during more difficult times.

“Cerberus deals don’t depend on financial engineering,” he says, echoing the argument many of his top rivals are seeking to push as the environment changes. “Deals that depend on a 50 basis point spread shouldn’t be done. We concentrate on deals with operational upside. We are not going to be radically affected.”

Although Cerberus will leave the day-to-day running of Chrysler to Mr Nardelli, the private equity group has already been drawing on Mr Snow to tackle political and labour issues. In June, Mr Snow gave a speech at the National Press Club in Washington arguing against a tightening of fuel economy standards for the motor industry.

Mr Snow could also take a more active role when Chrysler enters into a crucial round of talks later this year with the United Auto Workers union, which unexpectedly backed the Cerberus takeover in May. “I think I am the only Republican Treasury Secretary who ever had open endorsements of organised labour,” says Mr Snow, who spent more than a decade as chairman and chief executive of CSX, the railroad group.

Now that he is one of the private equity industry’s most senior statesmen, Mr Snow has strong views on proposals in Congress that would involve raising taxes on “carried interest”, or the profits that buy-out groups earn on deals.

While carried interest is currently taxed at the capital gains rate of 15 per cent, several senior lawmakers in both parties have said they would back taxing it at the ordinary income rate of 35 per cent. Mr Snow suggests that such a move could undermine investment in the US.

“I think that as the discussion goes on, the committees will understand,” he says. “If they don’t, they will upset something fundamental in the way the American economy is organised. So I think what is going to come out is something sensible and reasonable.”

One of the bills being discussed in Congress involves measures to levy higher taxes specifically on private equity groups that go public, as Blackstone has done, and KKR plans to. But Mr Snow is adamant that Cerberus is not considering a stock market listing. He says: “It’s nothing against firms that are going public but for the last 16 years we have had proven success and the strong preference of Cerberus management is to continue operating as a truly private private equity firm.”

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