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Wednesday, June 24, 2009

Should Ford Look A Gift Horse In The Mouth?

SEARCH BLOG: AUTOMOBILES

As The Detroit News reports today:

Feds loan Ford $5.9B to build greener cars

Nissan, Tesla also benefit from Energy Department funding

Bryce G. Hoffman / The Detroit News

Dearborn -- After nearly two years of political wrangling, the U.S. Department of Energy approved $5.9 billion in low-interest loans for Ford Motor Co. to help fund the development and production of new, more fuel-efficient cars and trucks.

The money will not just help pay for fuel-sipping engines and electric cars; it will help the nation's only solvent automaker survive one of the worst market declines in the industry's history, which has already sent its crosstown rivals into bankruptcy.

While I have no doubt that Ford appreciates the access to the money and lower interest rates, you have to step back to see that there is just something ominous in this "gift." Throughout the recent collapse of General Motors and Chrysler, Ford has been able to maintain a certain independence and that has been an advantage in both marketing and customer reaction. Now the Ford team will become "one of those guys."

Why has this happened? Besides the tough market conditions, the government has played the roles of Lenny and Louie. Lenny is the guy that causes a big problem for a business. In this case, completely unreasonable mileage mandates... especially for trucks. Then Louie steps in and offers a "little loan for a small price"... your company's soul. Later, when you are still struggling under Lenny's oppressive tactics, Louie informs you that he will have to take over your business "to save it." It looks like Ford is about to step into the quagmire.

How can I question this fabulous "gift?" How could I compare the Federal government to Organized Crime? Well, let me ask you a question: what happens to Ford when they take that money and build a lot of tiny, expensive cars and trucks that people don't want or can't afford?

UPDATE
From Automotive News:

The money announced for Ford today will reach the automaker as it does the work and spends the money. The first check could arrive within the next couple of months, she said. Some financial paperwork must be completed.

The initial loan money will be for work that dates back to December 2008 on projects such as Ford's electric vehicles and the turbocharging and direct-injection strategy known as EcoBoost, Cischke said. The money will be doled out through 2011, and payback will begin in 2012.

Ford qualified for loan assistance on projects affecting 13 nameplates and 11 factories in five states.

Vehicles include a electric Transit Connect small commercial van slated to go on sale in 2010 and an electric Ford Focus that will follow in 2011. Other approved projects involve six-speed transmissions and hybrid and ethanol-powered vehicles.

The loans give Ford access to money at low single-digit interest rates. Ford spokesman Mike Moran said today's interest rate on the loans will be 3.7 percent, compared with 13 to 15 percent if the company had tapped market-rate credit, he said.

Cischke said she hopes the public will distinguish these loans from the bailout money that Chrysler Group LLC and General Motors have received. Congress passed the original legislation in December 2007 and appropriated the money last fall.

"People need to understand that this is money that was separated a long time ago, actually before the economic crisis," she said. "I hope people do see it as different because it's very different. It's not emergency money.

"This is not about viability. This is about investment in the future and in fuel-efficient technologies that we need, and it helps us accelerate that."

And it won't give the government any ownership of or control over Ford's projects.

Said Cischke: "We decide what we're working on."

But keep looking over your shoulder, anyway. It may be "just a loan," but that doesn't mean the rules of the game can't change. Just ask the GM and Chrysler bondholders.

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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
It was beautiful and simple, as truly great swindles are.
- O. Henry
... The Government is on course for an embarrassing showdown with the European Union, business groups and environmental charities after refusing to guarantee that billions of pounds of revenue it stands to earn from carbon-permit trading will be spent on combating climate change.
The Independent (UK)

Tracking Interest Rates

Tracking Interest Rates

FEDERAL RESERVE & HOUSING

SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006 Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
November 28, 2007 FED VICE CHAIRMAN DONALD KOHN
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."
http://www.reuters.com/

December 11, 2007 Somehow the Fed misses the obvious.
fed_rate_moves_425_small.gif
[Image from: CNNMoney.com]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's Economy.com. "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.”
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)