Fed Crackdown Threatens Earnings at Capital One

Kicking the Tires at Ford

Ford (F Quote) has been getting kudos in the market and the media for selling $3 billion worth of auto loans to investment bank Bear Stearns in a transaction that the carmaker announced Tuesday. The sale allowed the company to free up around $200 million of capital, according to a favorable account of the deal in Wednesday's edition of The Wall Street Journal. The capital released would otherwise have been held as a reserve against bad loans, the Journal said.

But without further financial disclosure, it's hard to give the sale a proper assessment -- and it may not have been the home run that investors and the business press appear to have taken it as. For example, Bear Stearns would have wanted to be compensated for the credit risk of the loans, and that would partially or fully offset any capital boost that came from releasing the loan loss reserve. Ford declined to say how much of an offset took place.

To reflect the credit risk, the loans may have been sold at a discount, but Ford didn't give that either, saying more details would be available in its 2002 annual report.

Moreover, loan sales of this type are one of the least profitable ways for lenders to make money because in selling the bonds the holder forgoes the interest income, as well as the credit risk. This loan sale shouldn't be confused with securitization, which is a sale that still gives lenders some exposure to the interest income and credit risk.

The transaction is more a sign of a company in need of liquidity. And cynics might even say that Ford wanted to be rid of its own credit risk. In other words, caveat emptor.