Financial Crash - should we & Ford worry?

[TStag]

I confess to not knowing much about all this at all but as someone who follows the markets a bit I just wondered whether anyone else feels nervous about what's happening at the moment?

 

- firstly we have all this dodgy debt lying about causing chaos in the worlds financial markets

- secondly there are rumours in Europe tonight that a major European State bank is about to hit the wall (according to national news in the UK) - this could cause the world's financial markets to go into a real meltdown.

- thirdly some analysts are saying that the credit ratings agencies (like S&P) have under-estimated risk

- Finally US consumers are buying less from Wall Mart and Home Depot. If this isn't a blip and American consumers stop spending then could all of this and the above cause a global recession?

 

My concerns are for ordinary people and all those companies that we know and love. For example Ford's Finance arm carries a lot of debt. If credit tightens up around the world then I wonder if the cost of the debt will increase and derail Ford's recovery? More worrying is that if firms like Ford and GM get into trouble then the whole global system could get into further trouble.

 

Maybe I'm worrying about nothing, 'cos in truth all this is a little beyond me. But looking around I do wonder if the Global economy is built on sand....

[ANTAUS]

Let me add another concern that I'm seeing might come up...the Oil producing Arab countries that will say one day "Hey, U.S., your money isn't worth much in the global level, we want you to buy our oil in Euro's because it's worth more"..Case in point, we'll be paying a s---tload more for oil barrels. The only reason till this point that trade was done in dollars was because it was powerful...it's not anymore...

[Ford Jellymoulds]

Credit crunch could squeeze Michigan's auto industry

 

Read more.......

http://www.freep.com/apps/pbcs.dll/article...8/1019/BUSINESS

[TStag]

Let me add another concern that I'm seeing might come up...the Oil producing Arab countries that will say one day "Hey, U.S., your money isn't worth much in the global level, we want you to buy our oil in Euro's because it's worth more"..Case in point, we'll be paying a s---tload more for oil barrels. The only reason till this point that trade was done in dollars was because it was powerful...it's not anymore...

 

I totally agree that's one of those things that people are dismissing at present but I can see happening. The Euro is here now and it's possibly becoming the dollars equal, that in itself means we are in unchartered territory. So yes more risk...

[FordBuyer]

Common sense would say that a credit crunch will affect big ticket items, like housing, cars, and appliances. Housing has been affected big time and cars and appliances are being affected now. The only question is how much. This certainly is not good news for weak companies like Ford.

[one2gamble]

Let me add another concern that I'm seeing might come up...the Oil producing Arab countries that will say one day "Hey, U.S., your money isn't worth much in the global level, we want you to buy our oil in Euro's because it's worth more"..Case in point, we'll be paying a s---tload more for oil barrels. The only reason till this point that trade was done in dollars was because it was powerful...it's not anymore...

 

 

you need to add stable. It hasnt been the most "expensive" currency in a long time. There was just enough of it at a stable price to essentially use as a global currency.

 

As it continues to fall it may fall out of favor for something like the Euro, which appears to be holding stable.

[RichardJensen]

On the U.S. dollar--

 

This isn't a 'contest', as in the currency with the highest value vs. all others wins.

 

A decline in consumer spending may actually bolster the dollar, as it would reduce the current accounts deficit. Less purchasing = less imports = less dollars leaving the U.S.

 

If that happens, a rise in the value of the dollar would be concomitant with a decline in the global economy, as no other country or economic bloc appears capable of replacing the U.S. as the driver of the economy.

 

Ultimately, the Euro is, IMO, not as solid a currency as the dollar. The various economies underpinning it are not as sound and the ECB is subject to more interference than the Fed. All one has to do is look at the failure of several EU economies to flout the Euro targets for debt:GDP to see a looming crisis in the Euro, or at the very least an issue that will not go away on its own.

Edited August 16, 2007 by RichardJensen

[BlackHorse]

Richard, you gonna chime in on this or you are just gonna sit there and :reading:

[focus05]

I mean, this has been a long time coming. The U.S. consumer is pretty much the reason for the economic growth in the world right now. This comes from our willingness to borrow money and willingness to trade goods, currency and other capital more freely.

 

However, at a certain point, the consumer runs out of money - like now. There is a balance that has to be struck and dirt cheap interest rates would otherwise cause the economy to heat up, infaltion to grow and then hurt the economy (and the dollar) in a bad way. A correction is always needed. Whether or not this will actually be a recession is not clear.

 

I personally don't believe that this will be the cause of a world-wide recession. Slower growth through 2008, certainly. However, if people panic too much, it could lead to recession. Ultimately, we are our own enemies.

 

It could hurt Ford, but Ford's debt is not at risk. I suppose some of its interest expenses could grow, but Ford has $20 billion in cash to cover such things. Ford just probably can't take any additional debt until its credit rating improves. However, it doesn't need it unless it tries to form a HC trust, which would require billions of extra cash. I think Ford has enough to weather a recession. Ultimately, even in recession, people still buy cars, so Ford can survive.

 

Hopefully, as consumer spending drops off, corporations will spend a little of the cash mountains they have been building, and a Fed rate drop would help invest that cash even faster.

[Joe771476]

The truth is the federal govt. is broke, state and local govts. are finding it increasingly hard to raise taxes thus hard to balance their budgets, and middle income America is essentially broke from irresponsible credit card use. This liberal mentality that most Americans possess while also believing they deserve what ever they want, whenever they want, is a recipe for disaster. The balloon has been filling up with air. Could we call that inflation? Not really, just a little humor there in an otherwise very serious matter. But soon the balloon will pop, and 1929 will look like a tea party. And THAT won't be funny. Personally I can't wait. It will be a rude awakening for Americans and long overdue. This country needs to tighten its belt from the top down. By the way, I am one of those Americans but I can pay all my bills off tomorrow including my mortgage if I had to. Can you? You better be prepared to do so. I'll work at McDonald's if necessary to pay my taxes. You keep buying those 56-inch Jap TV's which you need like you need a hole in the head. Sad.

[g48150]

Lets see, what was the major thing that "hedge funds" had during the Reagan/Bush the 1st years? Defense Stocks

They bombed, but now are rockin' (mainly thanks to Bush the 2nd and the Neo Cons)

 

During Clinton it was: Internet and Technology Stocks

They bombed, but now are getting back up to speed

 

During Bush the 2nd it is: REITs and Mortgage Lenders

They bombed just now.

 

What do I personally see the "hedge funds" getting into next? Well then answer is in the Land O Lakes (no not Michigan, Minnesota, eh?)

 

There is one thing that is older than most of us, yet we use it every single day without worrying about it, what is this? Interstates and infrastructure.

 

This would be a good investment, and probably cause a major rethinking of how we as a nation get from point A to point B.

 

I mean, look how long they've lasted so far?

 

Tragedy breeds innovation, prepare for "smart roads" and bridges. You didn't think that they were just going to put all these civil engineers out to pasture did you?

 

On the financial side, there's a lot to be said for following the herd.

[bystander]

Ford should worry for three reasons:

 

1) The credit crunch will make debt even more expensive than it is (especially with a junk rating)

 

2) If the economy slows down as a result of the subprime meltdown, Ford is not in a good position to weather much of a drop in new car sales. Their already shrinking car and truck business could get a lot smaller a lot faster.

 

3) I wonder if they haven't been lowering their credit standards for car loans to bolster their sales. I remember seeing a sign in a Ford dealership about a year ago offering zero down new car loans to people with poor credit. That is kind of the sub-prime mortgage industry in miniature.

 

What would happen to Ford if large numbers of people began defaulting on their car loans? Hopefully, for Ford's sake, they bundled and sold off those loans to someone else.

[FordBuyer]

Ford should worry for three reasons:

 

1) The credit crunch will make debt even more expensive than it is (especially with a junk rating)

 

2) If the economy slows down as a result of the subprime meltdown, Ford is not in a good position to weather much of a drop in new car sales. Their already shrinking car and truck business could get a lot smaller a lot faster.

 

3) I wonder if they haven't been lowering their credit standards for car loans to bolster their sales. I remember seeing a sign in a Ford dealership about a year ago offering zero down new car loans to people with poor credit. That is kind of the sub-prime mortgage industry in miniature.

 

What would happen to Ford if large numbers of people began defaulting on their car loans? Hopefully, for Ford's sake, they bundled and sold off those loans to someone else.

 

Ford is offering car loans to credit risks, even those who have had vehicles repossessed in the past. I know that for a fact. But do they have a choice now? They will give you a loan if you have decent job, and are willing to pay big payments because of your poor credit history. Let's face it...many traditional domestic buyers are struggling in this economy, and the Domestics need their business. It certainly is a slippery slope giving credit to these people, but the alternative is much lower sales.

[jpd80]

On the U.S. dollar--

 

This isn't a 'contest', as in the currency with the highest value vs. all others wins.

 

A decline in consumer spending may actually bolster the dollar, as it would reduce the current accounts deficit. Less purchasing = less imports = less dollars leaving the U.S.

 

If that happens, a rise in the value of the dollar would be concomitant with a decline in the global economy, as no other country or economic bloc appears capable of replacing the U.S. as the driver of the economy.

 

Ultimately, the Euro is, IMO, not as solid a currency as the dollar. The various economies underpinning it are not as sound and the ECB is subject to more interference than the Fed. All one has to do is look at the failure of several EU economies to flout the Euro targets for debt:GDP to see a looming crisis in the Euro, or at the very least an issue that will not go away on its own.

Until recently, the US Dollar weakened enormously against nealy every currency, I'd see this as a market correction.

 

Also in parallel with this is that speculatory offshore money will now head for safe US stocks.

This is already happening and money is also flowing into the Japanese Yen.

Europe and Asia could take a big hit with a US slow down as well adding to money gravitating stateside.

[RichardJensen]

Until recently, the US Dollar weakened enormously against nealy every currency, I'd see this as a market correction.

 

Also in parallel with this is that speculatory offshore money will now head for safe US stocks.

This is already happening and money is also flowing into the Japanese Yen.

Europe and Asia could take a big hit with a US slow down as well adding to money gravitating stateside.

Of course, by contrast, if you look at where the Euro was launched vis a vis the dollar (at c. $1.19 per), and note the dollar's unjustified strength against global currencies in the early part of this decade, and the latter part of the last, it's also clear that what goes up must come down.

 

I would've expected rising interest rates in dollar denominated securities to offset the impact of the current accounts deficit, but that hasn't happened as yet.

 

However, I would not expect the Euro to trade at this much of a premium to the dollar indefinitely either, after all, what goes up.......

 

 

-----

 

Re: Ford Credit & subprimes--Ford hasn't to my knowledge had to increase loss reserves; the thing is, lending institutions MUST carry a certain percentage of defaults (it's basically an unwritten rule). A lending institution that has no defaults will be closely scrutinized for unfairly restricting access to credit. Strange but true.

 

IIRC, Ford Credit notched a substantial one-time gain in the recent past on a reduction of loss reserves. Observers of the business I think generally rate Ford Credit one of the better managed ILCs, and their portfolios of consumer debt usually carry high investment grade ratings. Something that would not happen if they salted their portfolios with plenty of default risks.

[bystander]

Re: Ford Credit & subprimes--Ford hasn't to my knowledge had to increase loss reserves; the thing is, lending institutions MUST carry a certain percentage of defaults (it's basically an unwritten rule). A lending institution that has no defaults will be closely scrutinized for unfairly restricting access to credit. Strange but true.

 

IIRC, Ford Credit notched a substantial one-time gain in the recent past on a reduction of loss reserves. Observers of the business I think generally rate Ford Credit one of the better managed ILCs, and their portfolios of consumer debt usually carry high investment grade ratings. Something that would not happen if they salted their portfolios with plenty of default risks.

 

Fair points. However, if auditors and outside analysts are able to accurately gauge default risk and thus the adequacy of loss reserves, how was it possible for the market to be blindsided by the subprime lending collapse?

[RichardJensen]

Fair points. However, if auditors and outside analysts are able to accurately gauge default risk and thus the adequacy of loss reserves, how was it possible for the market to be blindsided by the subprime lending collapse?

I haven't followed that as closely.

 

A quick review suggests that these companies specialized in high risk loans, and therefore are not as illustrative of what could happen at a place like FMC (and GMAC, and other ILCs and banks).

 

It's like this. If you have a portfolio of, say, 5% high risk loans, and you estimate a default rate of 75% on those 5% high risk loans, well, you've put 3.75% of your total loaned capital at risk, per your calculations. If the default rate jumps to even 95%, well you're looking at writing off 4.75% of your assets, which factoring in your allowance, means you're taking a hit on 1% of your total assets.

 

It's not something you want to happen, but it's manageable.

 

Now say that you've got 80% of your portfolio in high risk loans, with an estimated default rate of 75%---a change to 95% default impairs an additional 16% of your assets. Even if the change is as little as 3%, you're impairing 16 times as much capital in the second scenario as the first.

 

As you can see, it's a totally different ballgame.

 

Now those numbers are purely hypothetical, but serve to illustrate that an increase in defaults can severely impact a company that specializes in high risk loans.

 

We may see capital reserve requirements change dramatically--such that high risk lenders end up being captive units of larger and more stable banks, and seldom (if ever) standalone entities. An example would be Beneficial which is now part of HSBC.

 

----

 

As all this relates to the question of estimated risk: two things-- 1) even a minor change in default rates can cripple a poorly run high risk lender (which illustrates a problem not with the process of estimating loss, but with the management of the company), and 2) likely smarter investors shied away from these high risk loans, or made proper allowances for the likelihood of default.

[mlhm5]

From Forbes Magazine dated 5.23.07

 

"Ford predicts it will burn through $17 billion of its cash over the next three years. Assuming Ford's predictions are correct, that leaves $35 billion in assets apart from the car business. Subtract $48 billion in liabilities, and you are left with a value of negative $23 billion for everything Ford owns except the car business. In other words, Ford's car business would have to be worth $23 billion simply for the stock to have zero value. In order to justify Ford's current market cap of $16 billion, its car business would have to be worth close to $40 billion.

 

In sum, Ford and GM are both effectively bankrupt. Whether they end up declaring Chapter 11, or undergo a massive "restructuring" that amounts to the same thing, is hardly material. The only real question is Which will go first?"

 

Link to Article

[TStag]

Some interesting stuff in this thread. As a Brit I worry that over here we've had it too good for too long. I look round at what's happening every where else and I see fears over things like the recovery in mainland Europe, derivitives and oil prices being charged in Euro's rather than Dollars. Then there's all that debt, a reliance on China and India for cheap imports etc and it just makes me feel more unsettled. So I can't make my mind up am I worried because I can't remember ever having it so good in the UK or am I worried because there are genuine reasons to worry???

[jpd80]

From Forbes Magazine dated 5.23.07

 

"Ford predicts it will burn through $17 billion of its cash over the next three years. Assuming Ford's predictions are correct, that leaves $35 billion in assets apart from the car business. Subtract $48 billion in liabilities, and you are left with a value of negative $23 billion for everything Ford owns except the car business. In other words, Ford's car business would have to be worth $23 billion simply for the stock to have zero value. In order to justify Ford's current market cap of $16 billion, its car business would have to be worth close to $40 billion.

 

In sum, Ford and GM are both effectively bankrupt. Whether they end up declaring Chapter 11, or undergo a massive "restructuring" that amounts to the same thing, is hardly material. The only real question is Which will go first?"

 

Link to Article

This is a poorlly researched article designed to grab a headline. It looks like this guy skimmed the financial results and knocked together a hatchet report without understanding the figures he's throwing around.

The truth of the matter is:

1. Ford is not burning through cash as quickly as it thought as at 2007 Q2 cash on hand was $37.4 billion

2. The majority of Ford's debt is associated with Ford Credit customer based loans, over $40 billion.

These are all secured and indexed against interest rises.

3. Ford have stated that they have nearly completed changes resulting in a cost saving of $5 Billion per year recurring.

 

The smear job on Ford is nothing compared to the inaccuracies posted about GM,

same inaccurate assessment of figures with bigger inaccuracies of GM's liabilities.

Edited August 18, 2007 by jpd80

[mlhm5]

This is a poorlly researched article designed to grab a headline. It looks like this guy skimmed the financial results and knocked together a hatchet report without understanding the figures he's throwing around.

The truth of the matter is:

1. Ford is not burning through cash as quickly as it thought as at 2007 Q2 cash on hand was $37.4 billion

2. The majority of Ford's debt is associated with Ford Credit customer based loans, over $40 billion.

These are all secured and indexed against interest rises.

3. Ford have stated that they have nearly completed changes resulting in a cost saving of $5 Billion per year recurring.

 

The smear job on Ford is nothing compared to the inaccuracies posted about GM,

same inaccurate assessment of figures with bigger inaccuracies of GM's liabilities.

 

Ford has publicly stated that instead of going thru $17 billion they will spend $15 to $16 billion plus will lose money in 2007.

 

Just a reminder that Ford paid its new CEO, Alan Mulally, over $28MM last year even though Ford lost $12 billion. Ford has closed 14 plants and laid off 30K people in an effort to become profitable, however according to Mulally, "What we (Ford) needs to do now is create a product that the public will buy." As my ten year old grandson would say...DUH."

 

The debt of the car making operations, according to SEC filings by Ford is $29 billion.

 

The sale of Aston also reduced this debt by ~$900 Million, however IMO, the sale of Jaguar, Volvo and Land Rover are still necessary and like Aston, they will take losses on the sale of two, but may be a winner with Land Rover. Cash is king right now at Ford and the sale of these divisions has to happen to raise more cash.

 

North American operations are really hurting and increases in profit in SA and Europe are the only bright spot at Ford.

[jpd80]

Ford has publicly stated that instead of going thru $17 billion they will spend $15 to $16 billion plus will lose money in 2007.

 

Just a reminder that Ford paid its new CEO, Alan Mulally, over $28MM last year even though Ford lost $12 billion. Ford has closed 14 plants and laid off 30K people in an effort to become profitable, however according to Mulally, "What we (Ford) needs to do now is create a product that the public will buy." As my ten year old grandson would say...DUH."

 

The debt of the car making operations, according to SEC filings by Ford is $29 billion.

 

All of what you say is true but don't forget the $17 Billion Ford expected to burn through

included $10 Billion in 2006 Q4 and $1 Billion in 2007 Q1. So there's about $4-5 Billion yet to come.

 

People often Quote the 2006 $12.7 Billion "Loss" with out Qualifing that $10 billion of it

is in fact employee terminations/plant closure funds. So really the Operating loss was $2.7 Billion.

 

For what it's worth, I think the reporters actually dwell on the past by 6 to 8 months,

they're still ruminating 2006 Q4 while this years Q1 and Q2 haven't really sunk in with them.

Some time around Christmas, they'll realise ford turned a profit in Q2 2007.

 

Still, with two lack lustre Quarters to come, if Ford can hold these to small $300m losses

ending 2007 slightly down, they would have done extremely well in my books!

Unfortunately with outgoings I think they may post nearer $1 Billion loss.

[mlhm5]

All of what you say is true but don't forget the $17 Billion Ford expected to burn through

included $10 Billion in 2006 Q4 and $1 Billion in 2007 Q1. So there's about $4-5 Billion yet to come.

 

People often Quote the 2006 $12.7 Billion "Loss" with out Qualifing that $10 billion of it

is in fact employee terminations/plant closure funds. So really the Operating loss was $2.7 Billion.

 

For what it's worth, I think the reporters actually dwell on the past by 6 to 8 months,

they're still ruminating 2006 Q4 while this years Q1 and Q2 haven't really sunk in with them.

Some time around Christmas, they'll realise ford turned a profit in Q2 2007.

 

Still, with two lack lustre Quarters to come, if Ford can hold these to small $300m losses

ending 2007 slightly down, they would have done extremely well in my books!

Unfortunately with outgoings I think they may post nearer $1 Billion loss.

 

Basically Ford has bet the farm on Mulally's turn around plan.

 

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