What Would Old Henry Say?

For the first time in its 103 year history, the Ford Motor Co. is mortgaging its assets to raise $18 billion. The official word from the company:

The money is needed “to address near and medium term negative operating cash flow, to fund restructuring, and to provide added liquidity to protect against a recession or other unanticipated events.”

Ford is mortgaging its plants, office buildings, equipment, even its investment in other car makers such as Volvo. Investors should take note of what’s happening at Ford for several reasons.

After years of good credit where Ford was able to borrow without pledging collateral, Ford cannot access additional cash unless it puts up hard assets as security to lure lenders. It’s almost like consumers who have tapped their unsecured personal lines of credit and their credit cards and now need to offer additional mortgages on their homes to keep the cash flow cycle working.

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Ford is financially bleeding. The company lost $7 billion in the first nine months of this year. Just like the American consumer who has expanded too much when times were good by purchasing assets (in the case of consumers, a second or third home or maybe just a bigger one), Ford needs to raise cash to help pay its bills.

Some analysts have come out and said Ford is refinancing because it sees tough times ahead. For the first time, I need to agree with the analysts.

By the time this deal is done, Ford will have nearly $40 billion in cash to cushion itself from the hard times it obviously sees ahead. Unfortunately, for consumers, it won’t be that easy for them to raise cash during a recession because most do not have the assets to mortgage off. And, with the savings rate in America at its lowest level since the Great Depression, consumers don’t have a war chest like Ford.

Ford is being smart by raising the cash it can in anticipation of an economic slowdown ahead. Unfortunately, American consumers don’t have the luxury of raising money so easily to cushion their future cash flow problems.

NEWSFLASH–Manufacturing in the U.S. dropped last month for the first time in three years. The ISM factory index dropped to 49.5 in November from 51.2 in October. The manufacturing industry is said to be contracting when the ISM factory index posts a reading below 50. More evidence the U.S. economy is slowing.