Bloomberg is reporting that Cerberus has agreed to forego any profits on their Chrysler investment if the U.S. government were to provide aid to the ailing auto manufacturer (see Cerberus would Cede Profit).

Cerberus Capital Management LP, the buyout firm that owns Chrysler LLC, would forgo any profit from a future sale of the automaker should it receive federal financial aid.

Chrysler also expects the U.S. government to take a stake in the company in any bailout, Chief Executive Officer Robert Nardelli said today at a conference in Palm Desert, California.

Cerberus founder Stephen Feinberg “has basically gone on record saying he would forfeit” profit on a Chrysler sale in those circumstances, Nardelli said. “This would not be supporting a private-equity company with government funds.”

The no-profit pledge may help ease political opposition in Washington to an industry rescue, because Chrysler is the only one of the three U.S. automakers that isn’t publicly traded. Cerberus bought 80.1 percent of Auburn Hills, Michigan-based Chrysler from Daimler AG in 2007 for a $7.4 billion investment.

I have been among those who have questioned the logic of providing U.S. taxpayer money to bailout Chrysler, and by extension, Cerberus (see Preventing Moral Hazard and More GM and Chrysler Shenanigans).

Now while it is oh so very generous (note the sarcasm) of Cerberus to offer up this concession, there remain several unresolved issues:

1. If Cerberus is not to gain on any eventual sale of Chrysler, do they also expect not to lose? Do they expect to recoup their $7.4B investment?
2. Does forfeiting profit on the sale of Chrysler also imply forfeiting future operating profit should the bailout work? That is, does Cerberus deserve to be able to earn income (and pay itself dividends) should Chrysler eventually become profitable?
3. Since it’s almost a certainty that Chrysler would go bankrupt without government backing (see Is the End Nigh for Chrysler), is Cerberus’ new found religion really just a manifestation of its incentive to hedge potential losses?

In my opinion, any investment that the U.S. government makes in Chrysler should include a “severe” penalty for Cerberus. After all, why should Cerberus expect to receive anything more than one penny of return on in exchange for its $7.4B investment in Chrysler? And since Cerberus would lose all of its investment in Chrysler in the event of bankruptcy, the government could just happily wait for Chrysler to go belly up and then immediately step in to pick up the scraps.

So c’mon, who does Cerberus think it is kidding? While the offer appears benevolent, the motivation is all too transparent, …and a little disturbing.

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