I think many at Chrysler were getting a little delusional. Cerberus seemed to be a fairy godmother that would arrive on a white horse, wave a wand, and produce gold specks gently falling from the sky, bathed in bright light, that would help to alleviate all woes and woeful products.

Reality has come to Fairyland as Chrysler has slipped into a major financial funk just a few months into Cerberus Capital being crowned King of the ailing automaker.

At a meeting earlier this month, chief executive Bob Nardelli told employees the company is headed for a substantial loss this year and is trying to sell assets to raise cash.

“Someone asked me, ‘Are we bankrupt?’” Mr. Nardelli said at the meeting. “Technically, no. Operationally, yes. The only thing that keeps us from going into bankruptcy is the $10 billion investors entrusted us with.”

Strong and somewhat defeatist words from the former hammer czar. In an interview yesterday, Nardelli acknowledged making the comment, saying it was intended to “convey a sense of urgency” among employees. Sounds more like impending doom.

Fairyland is full of smoke and mirrors. It seems Cerberus in reality paid nothing to the Rhineland gang for their piece of the action. Like any good capital investment company, Cerberus put nothing down but agreed to invest $5 billion into Chrysler and another billion into its financial counterpart. Cerberus rounded up $10 billion from crazed investors to give Chrysler a temporary river of cash.

Indigestion must have set in from the moment Nardelli got the key to the executive wash room. Plywood Bob must have been wearing a pair of Home Depot safety glasses that blocked his vision from faulty production goals, a catch-up program on fuel saving technologies and an assortment of similar looking products. As we reported yesterday GM is raising the price of its cars due to commodity cost increases. The same skyrocketing costs are also hurting Chrysler.

So with Cerebrus’ river of cash about to recede into a drought it seems that Nardelli will assume a new chore. To try to stay afloat he will have to start selling off land and old rusting plants to generate some revenue.

When you start selling your assets like that, it doesn’t look good.