Chrysler rescue stirs Cerberus disclosure debate

DETROIT (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 disclosure.

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 Chrysler.

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 (GM.N), 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."

WHO REALLY OWNS CHRYSLER?

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 November 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)