Wednesday, November 4, 2009

Ford Wins Election

Ford, the least public of all U.S. auto firms, has increased its market share in 12 of the past 13 months.

Yesterday's election results out of Michigan were among the strongest signals yet that Americans want less federal intervention in the economy. Luckily for incumbent politicians, this election occurred not in voting booths but in America's auto showrooms. On the ballot presented to American consumers were two government-run U.S. companies, General Motors and Chrysler, and one shareholder-run U.S. auto manufacturer, Ford Motor Co.
Voting with their wallets, U.S. car buyers pushed Ford's sales up 3.3% in October from a year ago and 21% from September's levels, the company announced yesterday. This followed Monday's Ford announcement that the company earned almost $1 billion in the third quarter, including $427 million from its financing arm, Ford Motor Credit. Monday's results also showed a $357 million pre-tax profit in North America, the first in 18 quarters, as North American revenue surged 21%.
Meanwhile, Chrysler's sales plummeted 30% from year-ago levels. GM managed to post a 4.7% sales gain, but unlike Ford it had to discount heavily to do so, hurting profitability. Ford has been reducing sales incentives lately, so consumers at the margin are increasingly eager to buy cars sporting a blue oval on the hood.
Ford has increased market share in 12 of the past 13 months, remarkable considering that all tax-paying car buyers are now invested in Ford's competitors. GM, Chrysler and their financing arms have received more than $80 billion in Troubled Asset Relief Program (TARP) capital injections.
Savvy taxpayers must know they are making it even less likely they'll be repaid if they refuse to buy from the Obama Automotive Group. On Monday, the U.S. Government Accountability Office stated what most of the world already knows, that "Treasury is unlikely to recover the entirety of its investment in Chrysler or GM."
Bloomberg 
 
One Journal reader posted a message on the paper's Web site yesterday saying, "The boycott is working." We could spend all day debating whether consumers are standing on principle against government ownership or whether government ownership is already reducing the quality of GM and Chrysler products.
The real debate right now in Washington is whether GMAC, which now provides dealer and consumer financing for both GM and Chrysler, will be the first three-time loser among TARP recipients. After receiving $12.5 billion in two TARP capital injections, GMAC now seeks several billion dollars more. This would actually be the fourth bailout if you count the $900 million equity interest Treasury received when it converted a loan to GM into a GMAC investment.
No, sorry, this would be the fifth bailout if you count the $7.4 billion in FDIC-guaranteed debt that GMAC has been allowed to issue to obtain dirt-cheap financing. Should we count GMAC's use of the government's Term Asset-backed Lending Facility (TALF) as bailout number six? And did we mention that GMAC can also gather cheap capital via FDIC-insured deposits through its ownership of Ally Bank?
Despite all of this assistance, GMAC is back at the trough seeking more help to finance purchases from Obama Motors. That's because, unlike every other big TARP recipient that failed its government "stress test" and was ordered to raise more capital, GMAC could find no takers in the private market. No one seems to want to own GMAC's equity, and investors aren't too enthused about the company's bonds, either.
Even though the government is explicitly standing behind GMAC in numerous ways, the company's unsecured debt that trades without a federal guarantee still carries a significant yield. GimmeCredit analyst Kathleen Shanley points out that for similar debt maturing in 2014, GMAC bonds yield more than 30 basis points above those from Ford Credit.
Ford's example—though it has also used TALF—clearly shows that the business of financing auto purchases can exist and even thrive without billions in TARP capital injections. Moreover, thousands of banks and credit unions are no doubt happy to talk to consumers wanting a Chevy or a Dodge, so the systemic risk argument has no premise with GMAC.
We've seen the end of the cash-for-clunkers experiment in destroying valuable assets while shifting car purchases into the future and paying people to do what they already intended. We can't think of a better time for the government to take the next step toward a market economy in automobiles.
The people have voted. Treasury should now let consumers and investors decide which cars to purchase, and how to finance them.

 

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