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Tuesday, December 23, 2008 12:42 PM

Fed Destined To Become World's Largest Auto Dealership

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Not content with merely throwing money at the automakers, the Fed has new plans to become the world's largest auto dealership. Details of the plan were buried in this announcement: Fed Opens TALF Loans to All Borrowers, Extends Term.

The Federal Reserve revised its $200 billion program aimed at reviving credit to consumers and small businesses, extending the term of loans to three years from one year.

Under the Term Asset-Backed Securities Loan Facility, or TALF, the Fed will also loan to all eligible borrowers rather than through an auction process, the central bank said today in a statement in Washington. The change is designed “to provide more certain investor access,” the Fed said.

The central bank pledged Dec. 16 to “employ all available tools” to restore economic growth, including the TALF and other emergency lending. The Fed has already expanded its balance sheet to a record $2.3 trillion to stem the worst credit crisis in seven decades.

Under the TALF, the Fed will lend to holders of AAA-rated asset-backed securities backed by “newly and recently originated” loans. Those loans include education, car and credit-card loans, and borrowing guaranteed by the Small Business Administration. The Fed intends to have the TALF running by February.

The Fed said that it would accept securitized auto credits, including leases and auto dealer floor plan loans.
Hundreds Of Auto Dealers Will Fail

Hundreds, if not thousands of of auto dealerships will fail. They will fail because they over-expanded in response to fake economic signals coming from the Fed, just as the auto manufacturers did and the housing industry did.

Housing purchases that could have and should have taken place over a period of a couple of decades were crammed into a few short years as lending standards dropped to keep the Ponzi scheme going. Flush with the feeling of fake prosperity from rising home prices, consumers bought cars, trucks, and SUVs with the same reckless abandon as they bought houses.

Dealerships wanting their fair share of the action, rushed into floor plan decisions and made car loans with the same subprime characteristics as did the mortgage brokers. Those dealerships are now flooded with cars that nobody wants, just as housing inventory is stacked a mile high with pent-up selling demand from those praying that prices rise.

Sea of Unwanted Imports

The New York Times is writing about a A Sea of Unwanted Imports.

Above: A lot at the Port of Long Beach used to park cars. Click here for more Pileup Photos.

Gleaming new Mercedes cars roll one by one out of a huge container ship here and onto a pier. Ordinarily the cars would be loaded on trucks within hours, destined for dealerships around the country. But these are not ordinary times.

For now, the port itself is the destination. Unwelcome by dealers and buyers, thousands of cars worth tens of millions of dollars are being warehoused on increasingly crowded port property.

And for the first time, Mercedes-Benz, Toyota, and Nissan have each asked to lease space from the port for these orphan vehicles. They are turning dozens of acres of the nation’s second-largest container port into a parking lot, creating a vivid picture of a paralyzed auto business and an economy in peril.

“This is one way to look at the economy,” Art Wong, a spokesman for the port, said of the cars. “And it scares you to death.” “We’re supposed to move things, not store them,” Mr. Wong said.

Kurt Golledge, 48, was one of just two truckers loading his green, 75-foot-long hauler with cars last week. Mr. Golledge said eight of his colleagues were laid off this month because Toyota dealers did not want more deliveries.

“I was dropping cars in Henderson, Nev., about a month ago and the dealer told me: ‘Take ’em somewhere else and dump ’em,’ ” said Mr. Golledge, who works for a company called Allied Systems. “All the dealers are telling us the same thing.”

“The ships keep coming, but there’s nowhere for the cars to go,” Mr. Golledge said. He said he believed the vehicles he was loading would be his last before he was laid off, and he was already considering where he might find a new job.
World’s largest Chevrolet dealer files Bankruptcy

On October 11, in GM, Ford Death Watch I commented on two notable events:

  • The bankruptcy of Bill Heard Enterprises, the world's largest Chevrolet dealer.
  • Capital One Halting the Financing of N.Y., N.J. Car Dealers.

The US has far more autos and auto dealerships that it possibly needs. Evidence is crystal clear. Dealerships are flooded with cars to the point they cannot take any more deliveries, and why cars are stacking up at ports. Simply put, no one wants the damn things, at least at a price dealers and manufacturers are willing to offer.

Fed Decides We Do Not Have Too Many Dealerships

In spite of all evidence to the contrary, the Fed has decided that there are not too many car dealerships, and those dealerships don't have too many cars. Instead the Fed has come to the conclusion that dealerships just need financing to get over this "short term" blip.

The meaning of "short term" has been extended from 1 year to 3 years. During that time, the Fed will lend dealerships money based on existing floor plans.

Dealerships facing bankruptcy will come to the conclusion they have nothing to lose by applying for TALF funds. Indeed, faced with a choice of immediate bankruptcy vs. TALF, who would possibly turn down the money? And so weak dealerships that would otherwise quickly go bankrupt, have now been given a new lease on life, even if only for a few years or months.

The Fed has thus guaranteed that auto overcapacity will continue indefinitely by keeping dealerships that should go bankrupt, in business. This will put pressure on marginally profitable but struggling dealerships that night make it on their own accord if only the free market eliminated some of the competition.

Walking Away TALF Style

Dealerships will accept free money until it until runs out. Money will run out when the Fed accepts entire dealerships as collateral.

Note that the TALF program opens up huge fraud possibilities including but not limited to owners taking the money and paying themselves huge salaries and/or funneling the money into other ventures before handing over the keys of the dealership to the Fed and then walking away.

And walk away they will, as soon as all collateral the Fed is willing to accept has been pledged. And that is how the Fed will become the world's largest auto dealership.

Congressional investigations studying the Fed's balance sheet a year or so down the road will come to the conclusion "No one could possibly have seen this coming".

Mike "Mish" Shedlock
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