March 29, 2009 / 6:07 PM / 11 years ago

ANALYSIS-Chrysler rescue stirs Cerberus disclosure debate

    *Critics say Cerberus should disclose more on Chrysler 
    *Public funds in deal include Penn., Calif., Texas 
    *Cerberus says cannot put more money into Chrysler 
    By Poornima Gupta 
    DETROIT, March 29 (Reuters) - Cerberus Capital Management 
has received $5.5 billion in U.S. government funding for 
Chrysler and its financing arm and is seeking more, while 
maintaining what critics see as a black-box approach to 
    At the center of the debate is a big unknown: the identity 
of investors that provided Cerberus [CBS.UL] with funds to buy 
80 percent of the struggling automaker from Daimler AG in 2007 
in a $7.4 billion deal. 
    With U.S. President Barack Obama set to deliver a decision 
on Chrysler's request for more aid on Monday, critics say the 
firm should open up in return for new assistance. Some have 
also said Cerberus should put more of its own money into 
    Cerberus counters that it cannot name its investors because 
that would breach its agreements with them. 
    The firm also says it has a responsibility to its investors 
including universities, pension plans and charitable trusts 
that keeps it from investing more of their funds in Chrysler. 
    "The American taxpayer should receive disclosure about the 
precise relationship between Cerberus and Chrysler and how it 
is structured," said Robert Salomon, professor at New York 
University's Stern School of Business. 
    "This is a private investor that made a bad bet," he said. 
"They should pay for their bad bet." 
    Senator Chuck Grassley, a Republican critical of the lack 
of transparency in the $700 billion bailout of U.S. banks, said 
Cerberus should not be exempt from disclosure and should put 
more money into the struggling automaker. 
    "It's foolhardy of Cerberus, when they have got such a 
stake in Chrysler, to think that they can hide behind private 
equity," Grassley told Reuters. "Do they believe in Chrysler or 
don't they believe in Chrysler? If they believe in it they 
ought to be helping." 
    The Obama administration has said it will demand tough 
restructuring from Chrysler and rival General Motors Corp 
, but a person involved in the process said the U.S. 
autos task force had not pressed Cerberus for more disclosure. 
    "There is a reason it's called private equity," the person 
said, who asked not to be named because of the confidential 
nature of the closed-door discussions. 
    Cerberus Managing Director Tim Price said criticism of the 
firm for not putting more money into Chrysler reflects a 
misunderstanding of its role in managing investor funds. 
    "The money Cerberus has, as fiduciary, belongs to our 
investors," Price said. "Our investment guidelines limit the 
amount of capital committed to any single investment." 
    Cerberus took Detroit by storm almost two years ago, taking 
control of Chrysler in a deal the firm said was intended to 
rescue a struggling American icon. 
    That followed its acquisition the previous year of a 51 
percent stake in GM's financing arm, GMAC, an investment that 
has also sagged badly. 
    Cerberus has said it is willing to surrender its equity in 
Chrysler to the U.S. Treasury to use in restructuring, 
including using it to pay off creditors or the health care 
obligations owed to Chrysler's major union. 
    But a deal would be complicated because Cerberus is also 
one of Chrysler's creditors. It has proposed converting a $500 
million loan into equity, a move that could give it back an 
ownership stake and allow it to make good on a commitment to 
stay with the investment for the long haul. 
    Cerberus has also not spelled out what it proposes for 
ownership of Chrysler's financial arm, Chrysler Financial. 
    It has not disclosed anything about the investors in its 
Institutional Partners Series Four fund, which it tapped in 
purchasing Chrysler and GMAC. 
    Investors in that fund include the University of Texas, the 
University of California and Pennsylvania's Public School 
Employees' Retirement System. Those public institutions 
confirmed that they have stakes in the fund -- and by extension 
in Chrysler -- in response to questions from Reuters. 
    The Cerberus Series Four fund, valued at $7.5 billion in 
2006, had an annual loss of 15 percent as of Nov. 30, 2008, 
according to documents provided by the University of Texas. No 
more recent update was available. 
    Cerberus and co-investors in its automotive investments 
have also taken a hit. The value of Chrysler and GMAC is now 
about 7 percent of the $27 billion under management at 
Cerberus, down from about 12 percent after write-offs. 
    Critics say that given the aid from U.S. taxpayers, 
Cerberus should be subject to tougher reporting standards. 
    "There should be better disclosure for the firms that took 
public funds because now we're all owners," said Nicole Tichon 
of U.S. PIRG, a Washington-based public interest group. 
    Price said critics were applying a double standard. 
    "Why should these retirees, universities and charities, 
simply because they invest in Chrysler through a private 
investment manager, be required to take additional risks or 
make additional investments, when GM or Ford shareholders are 
not asked to do the same?" he said. 
    Despite the pressure, Cerberus remains dedicated to turning 
around Chrysler because of the importance of the American auto 
industry, Price said. 
    "The sense of higher calling comes from the desire to 
reinvigorate the U.S. auto industry, repatriate Chrysler," he 
said. "Now the situation has been exacerbated by this global 
financial crisis." 
    But Gerald Myers, a business professor at the University of 
Michigan and former auto executive, said the taxpayer-backed 
rescue of Chrysler means it needs to be more transparent. 
    "Public money is going in," Myers said. "If they are 
getting federal funds, they are quasi-public." 
 (Reporting by Poornima Gupta and John McCrank, editing by 
Martin Howell and Steve Orlofsky) 
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