Auto sales, auto bailouts, auto financing – nothing is at is seems

Researching the murky world of auto bailouts requires a few ground rules at the outset. Recipients of bailouts like to think of a bailout as a grant or giveaway program. In other words, any type of loan is not a bailout since the recipient was obligated to pay it back. On the other hand, absent a rescue loan, those same recipients claim that liquidation would be the result. A credit line, or loan, that would stave off liquidation would certainly seem to qualify as bailing someone out, wouldn’t it? With that in mind, we can look at the credit arms of the Big 3 (now the Big 2 since Fiat owns Chrysler).

As I’ll illustrate further along, Ford Motor Credit exercised multiple loan programs during the financial crisis. Ford Motor Co. likes to claim the company took no public bailout money and has leveraged that claim quite successfully in a public relations ad blitz into increased sales and a very visible division between them and their competitors. Ally Financial, formerly GMAC, is a private company and obtaining records is difficult. They have left a trail, however, and you can draw some viable conclusions accordingly.

In both cases, the public perception is strikingly different from reality. The amount of credit utilized, the sources, and the reasons behind it are not at all what you see on the nightly news. Nor what you hear from the rank and file if you live in the heart of the auto industry as I do. Let’s see if we can clear up some misconceptions.

Ford makes the claim that they didn’t receive any public bailout money at all. They did request a $9 billion dollar credit line from the Treasury.

Ford’s Request:
A “stand-by” line of credit in the amount of up to $9 billion
at Government borrowing rates, for a 10 year term, with TARP conditions,
to support our restructuring, including the acceleration of products
that consumers want and value.

In fact, Ford CEO Alan Mulally boldly proclaimed that he would take a $1 annual salary if they ever had to exercise it. They did not and he pocketed $17.9 million in 2009 and $26.5 million in 2010. What’s interesting is that Ford and GM took very different paths, but ended up with some similarities in their results. Ford dropped five of its seven brands, shuttered a quarter of its plants, got rid of a third of its workforce and had leveraged $23 billion prior to the financial crisis and was able to avoid bankruptcy. A shrewd move due to the public relations bennies. The new GM is now four brands, two-thirds the amount of dealerships, closed 14 plants, and a quarter of its previous employees gone. The difference being the source of the bailout funds, Ford internal (so to speak), and GM the taxpayer.

What Ford did do is lobby for GM and Chrysler bailouts so as to protect the supply chain and any systemic fallout that might follow. Ford Motor Credit (FMC) was absolutely a player in the bailout loan business just like GM and Chrysler. FMC falls under the umbrella of Ford Motor Co., so the claim of no bailout assistance at all is dubious at best. Fact is that absent your credit arm, your car sales will suffer. To what degree is unknown, but don’t forget that the dealer networks rely significantly upon the manufacturer’s credit arms to provide financing as well. Just as the supply chain can bring down the automakers, so can the credit arms. This is not to say anything illegal was done as it was not. Ford simply cannot make the claim that the company never received any assistance to stave off the fallout from the financial crisis.

FMC utilized several Treasury programs. They took $7 billion from the Commercial Paper Funding Facility (CPFF). They also utilized the Term Asset-backed Securities Loan Facility (TALF). This is all public knowledge, so it’s no secret. What is not at all well-known is the Central Bank Liquidity Swaps (CBLS). This was a $10 trillion dollar program set up by the Fed to swap U.S. dollars to foreign Central Banks to allow them to loan out U.S. funds. The European Central Bank (ECB) took advantage of the swaps in excess of $8 trillion dollars. Ford Motor Co. took advantage of this program to borrow U.S. funds from the ECB. Rather convenient in that it allowed Ford to borrow U.S. money via the ECB without having to publicly acknowledge doing so and in the process Mulally got to hold true to his pledge not to tap the $9 billion credit line and thus not have to take the $1 dollar salary. All completely legal. Ethical? You decide.

The bottom line is that Ford Motor Co. proper (as in the manufacturing arm) didn’t take Troubled Asset Relief Program (TARP) funds and didn’t reorganize under bankruptcy law. However, their credit arm did tap several credit lines, did indirectly access U.S. funds via the ECB and the company as a whole benefited from the supplier bailouts and the avoidance of disruptions caused by a potential liquidation of GM and Chrysler. So in many ways, they also got bailed out. This post from the Daily Reckoning breaks it down nicely.

The GMAC story is much different. They were converted into a bank holding company in order to qualify for TARP funds. The tab is $17.2 billion with a projected loss to taxpayers of $6.3 billion. It was a domino effect in that ResCap, which was the foray into the mortgage business, would have toppled GMAC which in turn would have brought down GM. So the solution was to convert GMAC into a bank by edict and allow them access to the government piggybank.

The story gets more muddled. The Chevy Volt has now halted production due to channel stuffing, in which dealers are forced to take on more inventory than they can sell. This allows the parent company, GM, to claim credit for the sale. The sale to the eventual end consumer is secondary. GM has been running supply on certain vehicles like their light truck line at over 120 days. The norm is considered 60 days. GM is under pressure to show the sales growth so they can get the stock price up to allow the final sale of the government’s share of the IPO stock. The Volt has been a classic bait and switch in that consumers are drawn in under the pretense of buying the heavily subsidized Volt and then redirected into a model like the Cruze which dealers have on hand and are much more profitable.

Channel stuffing is not new, nor unique to GM. What is new and you’re not hearing about in the press is what is called dealer floor plan (DFP) financing under TARP. DFP is financing extended to auto dealers under the manufacturers credit arm in order to allow the dealer have a large inventory on-hand. The dealers could never afford the overhead cost of having to pay for the cars on their lots before they sell them to the consumer. What happens is the car is built and delivered allowing the manufacturer to claim the sale. The credit arm of the manufacturer pays for the car and then issues a loan to the dealer to allow them to keep the car on their lot until sold with a monthly interest charge per vehicle. The average dealer loan is $5 million dollars and the DFP industry is valued at $100 billion.

Why is the DFP plan under TARP different? Because what is normally an expense to dealers via the interest charged per car on their lot has now become a money maker. The end result is taxpayer financed channel stuffing. You are picking up the tab for dealers to have more inventory than they can sell. These numbers from the National Automotive Dealers Association (NADA) tell the story –

Floor plan interest is actually -$48 per vehicle up from -$39 the year before. You can read the 2011 NADA report here. In it you’ll find this quote to explain this anomoly.

expense saw a negative measure of minus $39 per new vehicle
sold, reflecting assistance on floor plan for 2010

It means exactly what it says. Dealers are making money storing vehicles on their lots allowing the manufacturers to channel stuff and see those sales reflected in the artificially high SAAR numbers. The report does not breakdown which manufacturers or which dealers so trying to determine whether or not this is an aberration caused by the GM and Chrysler bailouts is not possible. Factor in that Ally Financial is not publicly owned and we don’t have access to exactly how the TARP money is being kicked back to actually pay the dealers for car storage. This is why you’re not hearing a public outcry from the dealers as manufacturers are forcing them to take delivery of cars they know they can’t sell. Can’t blame them when you and I are picking up the tab.

Is it any wonder than that the competitors are lining up to get in, or back in, the financing business? Car dealers are just like gas stations. They don’t make the real money selling cars just as gas stations don’t make their money selling gas. Gas stations make money on convenience food sales. Car dealers make money on parts and service. Financing is where the money is at and when you have access to the Treasury, financing cars and trucks, houses, RV’s, etc. are very appealing in this economy.

Chrysler numbers are nothing unique. The difference with Chrysler is the foreign ownership.

When you look at the whole picture, you can see that all three manufacturers were bailed out by some method, either directly or indirectly. Ford has its angle for playing word games. GM has separate motivations. Chrysler is now foreign owned. Nobody wants to see the real picture painted.

2 thoughts on “Auto sales, auto bailouts, auto financing – nothing is at is seems”

  1. Nice bit of homework, my friend. The dealers are making money off the taxpayers on unsold inventory. GM’s books look good. But, Ally Financial’s books must look like crap, right? I suppose if the economy does pick up, everybody will come out smelling like a rose except for the taxpayers. However, if the economy doesn’t pick up, Ally could be in trouble and where would those ripples stop?

    BTW, do I remember correctly that just before the GM IPO that the IRS forgave a big chunk of taxes due?

  2. Ally could be in trouble and where would those ripples stop?

    I know you know the answer to that question as we the taxpayer are the backstop for all of the too big to fails.

    Good memory Jim. GM got to write off $45.4 billion in taxes as they were attached to the “old GM”. I don’t think you’ll hear Obama promoting that either.

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