The Federal Reserve made disclosures today that it quietly made short-term loans to major institutions and Fortune 500 companies during the 2008-2009 economic meltdown. Among one of the companies listed as receiving a 3-month Commercial Paper Funding Facility (CPFF) promissory note from the Fed is Harley-Davidson, which received 33 loans totaling $2.3 billion in aid to meet operational needs. Other companies who received economic help include GE (12 loans totaling $16 billion), Verizon (two loans totaling $1.5 billion). Commercial paper was also purchased from McDonalds, UBS ($74.5 billion), AIG ($60.2 billion) and Dexia ($53.5 billion).
The concept of “buying paper” has been mislabeled by other sources as a bailout from the Fed, despite the fact that loans made by the Federal Reserve differ from the bailouts we saw for the auto and banking industries both by being for a short-term duration, and because they only replaced other short-term cash flow loans that disappeared during the financial crisis (that’s what you get for getting financial news from a motorcycle site that spells Warren Buffett’s name like a meal from which guests server their own food, and then over reports his lending amount to Harley-Davidson by over three-fold).
If anything this news shows the great lengths the Federal Reserve had to take in order to keep the credit market open for major American businesses and institutions. It should be noted that because of the Fed’s efforts these companies were able to receive the cash flow and short-term loans to stay afloat during the crisis, and now that the CPFF program is over, the Federal Reserve reports that it not only was paid back in-full by every borrower, but also made money on the interest of all the loans ($849 million in total).
The recent financial meltdown and subsequent recession all stem from the collapse of the credit market here in the United States. While there were many factors at play in the economic collapse (Wall Street: Money Never Sleeps is a pretty approachable narration of how this crisis occurred…bonus points for a Ducati/MotoCzysz cameo), a major issue stemmed from the fact that companies could not get the basic short-term loans they need to operate the normal course of their businesses. Complicating matters further were issues of leverage, where companies burrow money against their assets and earnings, in order to earn more money.
For example a company could borrow $1 million at 10% interest for a one-year period to make a new product, if that product then makes them $1.2 million in revenue during the course of that loan, they just profited by $100,000 (paying back the $1 million principal and $100,000 in interest back to the lender). In the case of Harley-Davidson, that principal amount was $2.3 billion and used to produce motorcycles and make loans to buyers, and that lender was the Federal Reserve.
This doesn’t takeaway from the fact that Harley-Davidson saw an 87% reduction in its total corporate revenue, and made less money in 2009 than the tiny motorcycle news blog Asphalt & Rubber, but painting these loans as a bailout by the government and signs of Harley-Davidson’s impending economic collapse is simply not the case (although we do believe in the validity of that latter point), and furthermore is not a belief shared by the financial industry. Harley-Davidson stock is up 2.45% at the time of this writing.
Full Disclosure: The author of this article has a financial interest in Berkshire Hathaway, General Electric, and Verizon.
Source: Washington Post via The Kneeslider
Some thoughts…
1) Are you telling me that they didn’t have cash reserves to survive a downturn??
2) I guess diversification of product IS better than targeting a single segment.
3) Unless it wa a condition of the bailout, getting rid of Buell makes even less sense since the product line is even MORE homogeneous.
4) It sucks to be a taxpayer when your government looks at you like an ATM machine
5) Hold your nose and vote Republican..
HD common stock closed @40.94 – NINE AND ONE HALF YEARS AGO. We could get back to that level soon – we closed today @33.05. Yes, Jensen, UP ! on the day. And, we’ve even seen a modest rally in recent months, but -
Oh Wait! volume has been falling as the price has risen. Is that bad?
WTF.
The “Lender of Last Resort”, indeed.
Well, ’tis the season for giving. I really should go buy a Sportster but I’d have to drive buy the dealer’s McMansion on the way. Really, I actually believe in free market capitalism. You know, survival of the fittest, creative destruction. Can you tell me where I find that ? China ? India ?
Hey Steve, you may want to read the article that this is based on before going all political about things you haven’t researched.
“By the fall of 2008, credit had frozen across the financial system, including the commercial paper market. The Fed then purchased commercial paper issued by GE 12 times for a total of $16 billion. It bought paper from Harley-Davidson 33 times, for a total of $2.3 billion. It picked up debt issued by Verizon twice, totaling $1.5 billion. ”
First off, this was issued by the Fed, not congress or the White House. Secondly, if the Fed were to consult anyone in regards to these “loans”, it would have been GW Bush’s cabinet in the fall of 2008. Thirdly, our current deficit can be more attributed to falling revenues due to the lowest tax rates in 50 years in combination with the largest recession since the Great Depression than spending. Lastly, the largest budget deficit this country has faced was the FY2009 budget, proposed and signed into law by GW Bush. This would be the same guy who came into office with a surplus, and projected surpluses through 2008, WHEN HE TOOK OFFICE. My advice to you would be to turn off the pundits on your AM dial/cable news channel and research the facts, think for yourself, then come to logical conclusions.
@Greg,
Beat me to it!
“My advice to you would be to turn off the pundits on your AM dial/cable news channel and research the facts, think for yourself, then come to logical conclusions.” few wiser words have been typed within a&s comments!
Greg… thanks for stating the FACTS and suggesting that the brain is put into gear before the mouth is set in motion.
also worth mentioning is the cost of the wrong war that misplaced an immense amount of resources & talent. These insane costs, while simultaneously allowing Afghanistan to fall backwards, never seems to enter the mind of someone who carelessly uses “socialism”. Meanwhile, one of the few senators to vote to this invasion, at a time when it was political suicide to vote no against bush, is in the White House).
Restore sanity
Although, Steve, I do enjoy your blog immensely, nice work!
Greg, we have researched politics and yes Republican policies are the source for the systematic dismantling of the Middle Class while transferring more wealth to the already rich. Since Reagan got the racist bible thumpers fighting racial integration of private christian schools in the South (ie. The “Moral” Majority) to join a crusade for a corporate selfish jesus, this nation has been on a crash course with bankruptcy.
Naturally, this will become a my team (R) can beat up your team (D) as though the political parties “fighting” are any more than a facade for the rich to distract the rest of us from their pillaging of this nation’s future. Class warfare in the nature of civilization waved by the rich against everyone else.