April 02, 2009

Cerberus Capital Management LP, which conceded its bet on the auto industry by walking away from Chrysler LLC this week, is now left with a consolation prize: the former lending arm of the auto maker, which has troubles of its own and an increasingly uncertain future.Under an unusual relationship Cerberus set up when it purchased Chrysler in 2007, the car operation and its lending business, Chrysler Financial, operated as sister companies, rather than as parent and subsidiary. Cerberus figured the finance company had the potential to generate big enough profits to offset any losses the car arm might generate if it ran into trouble, according to a person who helped the private-equity firm structure the deal.

Instead, amid a credit crunch and recession that have put Chrysler on the brink of bankruptcy, Chrysler Financial has struggled, relying on federal aid to sustain its lending business in recent months.By mid-April, a person familiar with the company's finances says, Chrysler Financial will have exhausted the $1.5 billion in federal aid it received through the Treasury's Troubled Asset Relief Program in mid-January. Last month, the company confirmed it will need an unspecified amount in additional aid to continue lending. And Tuesday, it announced it is laying off 80 employees, or about 2% of its work force, effective immediately.