Eric Fry

Transparency is essential in a free market. It enables market participants to make informed investment decisions.

Unfortunately, in America’s “free market” economy, transparency is a latchkey child. It only sees the light of day when someone breaks down the door and carries it outside. Institutions like the Federal Reserve and the Treasury explicitly and vehemently resist transparency. It is the enemy, they say, of an “independent” monetary policy.

During the crisis of 2008-9, the Federal Reserve and Treasury operated as covertly as the CIA – doling out trillions of dollars in bailouts and guarantees to a handful of coddled corporations. Those financial “black ops” produced myriad deceptions in the financial markets.

In addition to the Fed’s intended deception that insolvent financial firms are as fit as a fiddle, the Fed’s meddling also produced numerous knock-on deceptions like: the labor market is recovering, the housing market is bottoming out, the financial sector is reviving and Goldman Sachs never makes a trading loss.

The Fed’s secret meddling also produced a few very subtle deceptions – the kind that seem victimless…until you dig a little deeper.

During the crisis of 2008-9, for example, Ford Motor Company borrowed as much as $7 billion from a lending facility of the Federal Reserve. But the details of these borrowings did not come to light until just three weeks ago. And even now, very few investors – or car-buyers – seem to realize that GM and Chrysler were not the only “Big 3” car companies to receive a helping hand from the government. Ford also cashed a few government checks.

On December 3, 2008, Ford Motor Co.’s CEO, Alan Mulally, applauded the assistance the federal government extended to General Motors and Chrysler, while also declaring, “Ford is in a different position. We do not face a near-term liquidity issue, and we are not seeking short-term financial assistance from the government.”

Two years after this pronouncement, Ford remains “the auto company that did not receive a government bailout.” So pervasive is this legend, that tourists in Dearborn, Michigan can be seen wearing T-shirts like these:

Ford T-Shirt

Ford relishes this public perception and uses it to its economic advantage. Kudos to Ford. Now let’s look at the facts.

Just one month before Mulally declared, “We do not face a near-term liquidity issue, and we are not seeking short-term financial assistance from the government,” Ford Motor Credit had borrowed nearly $4 billion from the Fed’s Commercial Paper Funding Facility (CPFF). And just two weeks after this remark, Ford Motor Credit borrowed an additional $3 billion from the CPFF. In all, Ford borrowed $7 billion between October 27, 2008 and June 17, 2009.

Furthermore, shortly after Mulally claimed to be in a “different position” from that of GM and Chrysler, Ford’s borrowings from the CPFF placed Ford in a nearly identical position.

Ford's Average Monthly Loan Balances at the Fed's CPFF

The Ford borrowing timeline looks like this:

10-27-08 – Ford Motor Credit borrows $1.980 billion from the CPFF
10-29-08 – Ford Motor Credit borrows $990 million from the CPFF
10-31-08 – Ford Motor Credit borrows $991 million from the CPFF
11-18-08 – Mulally flies to Washington in the company’s corporate jet and asks for financial assistance. The event is a PR nightmare because the CEOs of GM and Chrysler also fly to Washington in private jets.
12-3-08 – Mulally drives a Ford Escape hybrid to Washington and asks for a $9 billion credit line to use “if industry conditions worsen.” Mulally says he’ll work for one dollar per year if he taps the credit line.
12-8-08 – Mullaly declares, “Ford fully supports an effort to address the near-term liquidity issues of GM and Chrysler, as our industry is highly interdependent and a failure of one of our competitors could affect us all… For Ford, a line of credit would serve only as a critical backstop or safeguard against worsening conditions, as we drive transformational change in our company.”
12-18-08 – Ford Motor Credit borrows $1.984 billion from the CPFF
12-19-08 – Ford Motor Credit borrows $992 million from the CPFF, to bring its today CPFF borrowings to nearly $7 billion. Ford would continue rolling over these loans for the next several months.
1-29-09 – Ford announces a $5.9 billion loss for the quarter but insists it does not need financial help from the government.
1-29-09 – Ford Motor Credit rolls over $1.488 billion of CP with the CPFF

2-13-09 – Ford Motor Credit rolls over $496 million of CP with the CPFF
3-2-09 – Ford Motor Credit rolls over $1.984 billion of CP with the CPFF
3-18-09 – Ford Motor Credit rolls over $1.984 billion of CP with the CPFF
3-19-09 – Ford Motor Credit rolls over $1.980 billion of CP with the CPFF
5-19-09 – Ford Motor Credit rolls over $992 million of CP with the CPFF
6-17-09 – Ford Motor Credit rolls over $992 million of CP with the CPFF

Mulally deserves no blame for availing himself of funding that was freely – if very privately – provided by the Federal Reserve. After all, Mulally’s Wall Street counterparts were already busy tapping various credit facilities at the Fed. So can we blame Mulally for thinking to himself, “Hey, I’d like to tap that too!”?

Nor does Mulally deserve blame for failing to disclose the assistance. On the 18th page of the business plan Ford submitted to the Senate Banking Committee on December 2, 2008, the document states: “At Ford Credit, and in light of the frozen capital markets, we…are eligible for and are participating in funding programs from the European Central Bank and, more recently, the Federal Reserves Commercial Paper Funding Facility (CPFF).”

However, on the second page of that very same document, Ford states that it is “in a different situation from our competitors, in that we believe our company has the necessary liquidity to whether this current economic downturn – assuming that it is of limited duration.”

The “different situation” disclosure is the one that Mulally nurtured in his public remarks and the one that the public embraced. Mulally wasn’t lying; he was posturing. And posturing, as a tactical maneuver, can be brilliant. Certainly, Mulally’s posturing served Ford very well during the crisis…and continues to serve it well today. Therefore, Ford shareholders have every right to be pleased with Mulally’s public remarks; the champions of free markets and transparency, less so.

The point of our tale is not to cast stones at Mulally, but rather to catapult boulders at the Federal Reserve, and by extension at the exalted notion that institutionalized secrecy is an essential component of “guiding” a free market economy… In fact, if we had enough boulders, we would also catapult them at the idea that the economy requires any guidance at all from the Federal Reserve.

Thanks to the Fed’s secret dealings, companies like Ford could obtain the government’s assistance, while appearing to operate without it. That was a very convenient circumstance in the depths of the crisis…both for the bailout recipients and for the officers of bailout recipients.

“Bailout” was a very bad word in 2008. And any CEO who asked for a bailout was an unpopular guy, especially if he asked for a bailout and continued to draw a multi-million-dollar salary. Consequently, numerous CEOs offered to “work for a dollar” in order to keep the barbarians at the gate. Very few CEOs wanted to appear to be profiting at the taxpayers expense, although they clearly had no qualms about not appearing to benefit at the taxpayers expense, especially if they could actually benefit without the appearance of it.

Mulally found that path. Offer to work for one dollar if Ford ever tapped a $9 billion credit line, but continue to draw a multi-million paycheck while quietly borrowing $7 billion from the Fed.

But there’s another reason why Mulally might have accentuated the positives about Ford’s financial position, while whispering the negatives: it was a good business decision for Ford…if not a great business decision. During the crisis, Ford grabbed market share from its Big 3 rivals. Part of the reason was – and continues to be – the perception that Ford received no help from the government.

According to a survey of 1,000 adults, conducted about two months ago by the Rasmussen Reports, “Twenty-seven percent say they or someone they know has avoided buying a GM car because of the bailout and government takeover.”

“Ford did not seek a government bailout,” the Rasmussen Reports states flatly, “and 55% of Americans say they are more likely to buy a Ford car for that reason… In fact, 18% say they or someone they know has bought a Ford car just because the company did not take any bailout funding.” Not surprisingly, as the nearby chart illustrates, Ford’s market share began increasing very significantly in late 2008…and it continues to increase to this day.

The 'Big 3' Market Share of Total US Auto Sales

Buying a good car for the wrong reason is not the worst thing someone could do. But why not let the free market and/or Consumer Reports decide which automaker deserves to sell a car? Why should the Federal Reserve play any role whatsoever in this equation?

To reiterate, we don’t blame Mulally or Ford for taking advantage of an advantageous situation. We blame the Federal Reserve (and the Treasury) for nourishing an environment of preferential treatment, non-disclosure, backroom deal-making and every other form of capricious market manipulation.

Our conclusion: Abolish the Fed and let the free markets decide who wins and loses.

Regards,

Eric Fry
for The Daily Reckoning

Eric Fry

Eric J. Fry, Agora Financial's Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research, institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

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