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.