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The Daily Reckoning | Monday, December 20, 2010 Fed-sponsored market deception - the winners and the losers, How Ford Motor Co. tapped billions of taxpayer dollars, Plus, Bill Bonner on the march of the zombies and plenty more... How the Fed Interprets Free- Market Capitalism Cutting Out the BS of Crisis-Era Bailout Activities Eric Fry Reporting from Laguna Beach, California... Deception, like a mushroom, flourishes in darkness and manure. And the only way to end a deception is to drag it out into the light...and cut out the BS. Two weeks ago, for the first time ever, the Federal Reserve dragged its crisis-era bailout activities out into the light of day (thank you Senator Bernie Sanders and Congressman Ron Paul!). The resulting revelations exposed a number of shocking truths, like the truth that the big Wall Street banks did not merely receive one $10 billion loan each from the TARP facility; they also received tens of billions of undisclosed loans from other lending facilities. On top of that, many of the big banks raised hundreds of billions dollars by secretly selling mortgage-backed securities directly to the Fed. These massive undisclosed bailouts contributed greatly to the relatively robust earnings results many big banks produced during 2009 and early 2010 - results that would have been impossible without the hidden assistance. Accordingly, stock market participants came to believe the fiction that the big banks were "healthy," rather than the truth that they were massively subsidized. As opinions changed, so did share prices, corporate bond prices, credit default swap prices, etc. Some investors made money from the resulting asset-repricing, some lost money. Neither side reaped the reward it deserved, but only the result that the Fed's manipulations produced. In an honest and transparent marketplace, the list of winning and losing investors would have been very different than the actual list that emerged from the crisis. In a truly free market, the financial markets, themselves, pick the investors who win or lose, not the Chairman of the Federal Reserve or the Secretary of the Treasury. Deceptions flourished during 2009, primarily because the Fed was secretly pumping trillions of dollars into various private companies without ever disclosing the recipients, timing or sums involved. The outside world was left to guess. By so doing, the Fed dramatically "un- leveled" the playing field of American capitalism. Many undeserving companies benefitted from preferential treatment during the crisis, while many deserving investors, savers and taxpayers directly or indirectly subsidized this preferential treatment. That's not free-market capitalism, dear investor. That's cheating. The Daily Reckoning Presents The Half-Truth and Nothing But the Half-Truth by 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 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. 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. 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 Exposed! How Wall Street's Breaking the Rules... Wall Street is secretly breaking the rules, and making a mint! Now you can too - it's 100% legal - and could have already bagged you $123,850! Skeptical? Curious? Then simply click here right now to find out more. Bill Bonner US Wealth Distribution: Where Zombies Go to Feast Bill Bonner Reckoning from Delray Beach, Florida... A warning... Bad stuff coming! We've come to the warm latitudes for our Christmas holiday. Your editor didn't really want to do so. He travels so much for business, he longed to stay home for Christmas. He imagined himself sitting in front of the fire...happily drinking eggnog and eating fruitcake. Or, cutting down trees and mending fences. It was not to be. He was outvoted. Here we are in Florida...on our way to Nicaragua...where we will spend Christmas not too far from the scene of an incipient border war... We haven't been down there for 2 years. We're going to find out what is going on. First, we have to warn readers. Bad times are coming. Our Indian colleagues alerted us. The Hindu era of Kalyug is beginning. What's Kalyug? It's the "age of bad stuff...about 432,000 years of it!" Whoa. Well, that kind of puts our worries about de-leveraging debt crises into perspective, doesn't it? By our calculation, de-leveraging will end and we'll still have about 431,992 years of Kalyug to get through. Those Hindus really do think long-term, don't they? We Episcopalians are more short-term oriented. We'll worry about things 6 months out. Maybe 24 months. But that's about it. Not much action on Friday. The Dow was down 7. Gold was up $8. What do we see 24 months into the future? Well, you'll probably think we're kidding about this, but we're actually very serious: The zombies are taking over. We're not joking about this zombie thing. Look at what is happening. Here's a report fromBloomberg: Dec. 15 (Bloomberg) - The gap between the haves and have-nots in the US is being drawn along geographic lines, Census Bureau data showed yesterday. The number of counties where median household income decreased is almost 10 times the number that saw an increase, according to a Bloomberg analysis of Census figures comparing an average of the years 2005-2009 with 2000. The government figures also showed a concentration of wealth and education in coastal states. The Washington metropolitan area emerged as the wealthiest and most educated region of the past five years. The only three communities with median household incomes higher than $100,000 are in suburban counties in Virginia. Maryland, which also borders the nation's capital, saw income levels in Howard County increase at the eighth-fastest pace in the US since 2000. The Washington suburbs are home to government contractors such as Bethesda, Maryland-based Lockheed Martin Corp., the world's largest defense company, and General Dynamics Corp., the Falls Church, Virginia-based maker of Abrams tanks and Gulfstream business jets. The Washington Post, the zombie paper, gave the news a positive tune: "Area Counties Richest in Nation," was the headline...or something like that. So you see, this "geographical" distribution is really a zombie distribution. If you work for the feds - directly or indirectly - you get more money. Most likely, you're no longer creating wealth; you're consuming wealth that others created. That's what being a zombie is all about. And as a society becomes more corrupt and degenerate, there are more and more zombies and fewer wealth-creating citizens. But wait. There's more...below. And more thoughts... The zombification process runs deep. It changes the nature of what most people regard as "wealth." Instead of wanting to own a profit-making business, or lend to a wealth-increasing enterprise, more of what passes for wealth is actually a claim against the government. It is a promise by sitting politicians to rip off the future on behalf of the present. Let's look at how it works... In an economy like India's, a man who wants to prosper will start a business of his own...or invest in someone else's business. If he wants a decent retirement, he will have to save real money. He'll need real capital...which supports him by producing real interest or real earnings. He has a claim against future increases to the world's wealth. But that is wealth that he helped create...by saving and investing. But in the US, more and more people depend on the government for their retirement financing. The government pledges to take money from future earnings too. But it is a zombie claim; it does not depend on adding to the world's wealth. It merely takes away the wealth of others. If an American wants a good-paying job, he looks to the government itself, knowing that its salaries are higher than those in the private sector, and more reliable. And even if the American invests in a private business, the enterprise is more and more likely to depend on the government for contracts, subsidies, tax breaks, regulatory approval or bailouts. Gradually, "wealth" itself becomes zombified. Insurance policies are backed by government bonds - local or federal. Pensions are heavily dependent on claims against the government. And don't forget that 42 million people in the US depend on government handouts just so they can eat. Food stamps - the breakfast, lunch and dinner of zombies - have never had so many takers. This process is completely predictable. The more you subsidize zombies, the more zombies you get. And as the zombie population grows, it becomes more difficult to support. Finally, the paper zombie claims - US Treasuries/welfare/government employment/the US dollar - fall in value. There are too many of them for the private sector to sustain. PIMCO chief and bond expert Bill Gross says the Fed's purchases of US Treasury bonds "will likely signify the end of the great 30-year bull market in bonds." That's just the way it works. As the parasites grow, the host weakens. The more you borrow, the lower your credit rating. The more women you date, the harder it is to remember their names. *** The poor Irish. Moody's downgraded their debt. Not just one level. Five levels. Irish debt is now rated at the same level as Russian debt. Isn't it obvious that the Irish problem is not just a cashflow crisis? The problem is solvency, not liquidity. Irish banks got in over their heads. Then, the Irish government jumped in the water after them, taking on the debt of the banks. The solution? Simple. Default. But zombification continues in Europe as in America. Claims against profit-making (though reckless) private banks are now claims against the government. And governments can print money as well as lend it. The European Central Bank is doing the same thing the Fed is doing. It is buying up bonds issued by Ireland and other nations - at the rate of about $1 billion per week. Regards, Bill Bonner, for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com America: Lower Taxes, More Spending and Fewer Riots You might think it is reckless to extend the tax reductions, what with the nation going broke and all. Or you might think it hardhearted not to give more handouts to the little guy, what with the Great Correction underway. But it’s always inspiring to see the peoples’ representatives joining hands and doing something that is truly stupid. Lower taxes AND more spending too! Why Consumer Prices Are Flat Despite Fed Stimulus The Unwavering and Inimitable Ron Paul Laughing at Fiscal Absurdity I was cowering inside the Mogambo Bunker Of Fear (MBOF) in preparation for the release of the news from the Federal Reserve about how much credit those treacherous bastards created last week, expecting it to be a Big Whopping Bunch (BWB) since they have already announced that they were going to create an astounding $600 billion in the next six months as part of their shameful new Quantitative Easing 2 crap... The Albatross that Happens Upon Hapless Homeowners Private Sector Obliged to Work Off the Public Debt A Capital Paradox What, exactly, is economic capital? It is the productive potential of the economy, the ability to make things that people need and want to consume. But unlike paper, capital does not grow on trees. Capital itself must first be produced, in the form of capital goods. Let’s start from the beginning... 10 Amazing Facts About Oil Shadowstats’ John Williams Expects Hyperinflation Within Months The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor