UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-6368

Ford Motor Credit Company LLC

(Exact name of registrant as specified in its charter)

Delaware (State of organization)		38-1612444 (I.R.S. employer identification no.)
One American Road, Dearborn, Michigan (Address of principal executive offices)		48126 (Zip code)

Securities registered pursuant to Section 12(b) of the Act:

		Name of each Exchange
Title of each class		on which registered
7 3/8% Notes due October 15, 2031		New York Stock Exchange
7.60% Notes due March 1, 2032		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes o No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No

All of the limited liability company interests in the registrant (“Shares”) are held by an affiliate of the registrant. None of the Shares are publicly traded.

REDUCED DISCLOSURE FORMAT

The registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.

 

 

EXHIBIT INDEX APPEARS AT PAGE 56

PART I

ITEM 1. BUSINESS

Overview

Ford Motor Credit Company LLC (referred to herein as “Ford Credit”, the “Company”, “we”, “our” or “us”) was incorporated in Delaware in 1959 and converted to a limited liability company in 2007. We are an indirect, wholly owned subsidiary of Ford Motor Company (“Ford”). Our principal executive offices are located at One American Road, Dearborn, Michigan 48126, and our telephone number is (313) 322-3000.

Our annual reports on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge through our website located at www.fordcredit.com/investorcenter/. These reports and our current reports on Form 8-K can be found on the SEC’s website located at www.sec.gov.

Products and Services. We offer a wide variety of automotive financing products to and through automotive dealers throughout the world. Our primary financing products fall into three categories:

	•		Retail financing — purchasing retail installment sale and lease contracts from dealers, and offering financing to commercial customers, primarily vehicle leasing companies and fleet purchasers, to lease or purchase vehicle fleets;
	•		Wholesale financing — making loans to dealers to finance the purchase of vehicle inventory, also known as floorplan financing; and
	•		Other financing — making loans to dealers for working capital, improvements to dealership facilities, and to purchase or finance dealership real estate.

We also service the finance receivables and leases we originate and purchase, make loans to Ford affiliates, purchase certain receivables of Ford and its subsidiaries and provide insurance services related to our financing programs.

We earn our revenue primarily from:

	•		Payments made under retail installment sale and lease contracts that we purchase;
	•		Interest supplements and other support payments from Ford and affiliated companies on special-rate financing programs; and
	•		Payments made under wholesale and other dealer loan financing programs.

Geographic Scope of Operations and Segment Information. We conduct our financing operations directly and indirectly through our subsidiaries and affiliates. We offer substantially similar products and services throughout many different regions, subject to local legal restrictions, and market conditions. We divide our business segments based on geographic regions: Ford Credit North America (“North America Segment”) and Ford Financial International (“International Segment”). The North America Segment includes our operations in the United States and Canada. The International Segment includes our operations in all other countries in which we do business directly and indirectly. For additional financial information regarding our operations by business segments and operations by geographic regions, see Note 19 of our Notes to the Financial Statements.

North America Segment

We do business throughout the United States and Canada. Our United States operations accounted for 64% and 65% of our total managed receivables at year-end 2009 and 2008, respectively, and our Canadian operations accounted for about 11% and 9% of our total managed receivables at year-end 2009 and 2008, respectively. Managed receivables include on-balance sheet receivables, excluding unearned interest supplements related to finance receivables, and securitized off-balance sheet receivables that we continue to service. For additional information on how we review our business performance, including on a managed basis, refer to the “Results of Operations” section of Item 7 of Part II of our 10-K Report.

In the United States and Canada, under the Ford Credit brand name, we provide financing services to and through dealers of Ford, Lincoln and Mercury brand vehicles and non-Ford vehicles also sold by these dealers and their affiliates. We provide similar financial services under the Volvo brand name to and through Volvo dealers.

Item 1. Business (Continued)

International Segment

Our International Segment includes operations in three main regions: Europe, Asia-Pacific, and Latin America. Our Europe region is our largest international operation, accounting for about 22% of our total managed receivables at year-end 2009 and 2008. Within the International Segment our Europe region accounted for 88% and 85% of our managed receivables at year-end 2009 and 2008, respectively. Most of our European operations are managed through a United Kingdom-based subsidiary, FCE Bank plc (“FCE”), which operates in the United Kingdom and has active branches in 11 other European countries. In addition, FCE has operating subsidiaries in Hungary, Poland, and the Czech Republic that provide a variety of wholesale, leasing and retail vehicle financing. FCE also has subsidiaries in Sweden and the United Kingdom. In our largest European markets, Germany and the United Kingdom, FCE offers most of our products and services under the Ford Credit/Bank brand. In the U.K., FCE also offers products and services under the Volvo Car Finance brand while in Germany this is provided through a different Ford subsidiary. For additional information on Jaguar, Land Rover, Mazda, and Volvo, refer to the “Overview — Our Response” section of Item 7 of Part II of our 10-K Report. FCE generates most of our European revenue and contract volume from Ford Credit/Bank brand products and services. FCE, through our Worldwide Trade Financing division, provides financing to distributors/importers in countries where typically there is no established local Ford presence. The Worldwide Trade Financing division currently provides financing in over 70 countries. In addition, other private label operations and alternative business arrangements exist in some European markets. In the Asia-Pacific region, we operate in Australia and China. In the Latin America region, we operate in Mexico, Brazil, and Argentina. We have joint ventures with local financial institutions and other third parties in various locations around the world.

Dependence on Ford

The predominant share of our business consists of financing Ford vehicles and supporting Ford dealers. Any extended reduction or suspension of Ford’s production or sale of vehicles due to a decline in consumer demand, work stoppage, governmental action, negative publicity or other event, or significant changes to marketing programs sponsored by Ford, would have an adverse effect on our business. Additional information about Ford’s business, operations, production, sales and risks can be found in Ford’s Annual Report on Form 10-K for the year ended December 31, 2009 (“Ford’s 2009 10-K Report”), filed separately with the SEC and incorporated by reference as an exhibit to our 2009 10-K Report (without financial statements and exhibits).

Ford has sponsored special-rate financing programs available only through us. Similar programs may be offered in the future. Under these programs, Ford makes interest supplements or other support payments to us. These programs increase our financing volume and share of financing sales of Ford vehicles. Our funding costs have increased compared with our competition; this has increased our reliance on Ford-sponsored special-rate financing programs offered exclusively through us. For additional information regarding interest supplements and other support costs earned from affiliated companies, see Note 18 of our Notes to the Financial Statements.

Competition

The automotive financing business is highly competitive due in part to web-based credit aggregation systems that permit dealers to send, through standardized systems, retail credit applications to multiple finance sources to evaluate financing options offered by these finance sources. Our principal competitors for retail and wholesale financing are:

Retail		Wholesale
•     Banks		•     Banks
•     Independent finance companies		•     Other automobile manufacturers’ affiliated finance        companies
•     Credit unions and savings and loan associations		•     Credit unions
•     Leasing companies
•     Other automobile manufacturers’ affiliated finance        companies

We compete mainly on the basis of service and financing rate programs, including those sponsored by Ford. A key foundation of our service is providing broad and consistent purchasing policies for retail installment sale and lease contracts and consistent support for dealer financing requirements across economic cycles. Through these policies we have built strong relationships with Ford’s dealer network that enhance our competitiveness. Our ability to provide competitive financing rates depends on effectively and efficiently originating, purchasing and servicing our receivables, and accessing the capital markets. We routinely monitor the capital markets and develop funding alternatives to optimize our competitive position. Ford sponsored special-rate financing programs available only through us gives us a competitive advantage in providing financing to Ford dealers and their customers.

Item 1. Business (Continued)

Seasonal Variations

As a finance company, we own and manage a large portfolio of finance receivables and operating leases that are generated throughout the year and are collected over a number of years, primarily in fixed monthly payments. As a result, our overall financing revenues do not exhibit seasonal variations.

Retail Financing

Overview and Purchasing Process

We provide financing services to retail customers through automotive dealers that have established relationships with us. Our primary business consists of purchasing retail installment sale and lease contracts for new and used vehicles mainly from Ford, Lincoln and Mercury dealers. We report in our financial statements the receivables from customers under installment sale contracts and certain leases with fleet customers as finance receivables. We report in our financial statements most of our retail leases as net investment in operating leases with the capitalized cost of the vehicles recorded as depreciable assets.

In general, we purchase from dealers retail installment sale contracts and lease contracts that meet our credit standards. These contracts primarily relate to the purchase or lease of new vehicles, but some are for used vehicles. Dealers typically submit customer applications electronically. Some of the applications are automatically evaluated and either approved or rejected based on our origination scorecard and credit policy criteria. In other cases, our credit analysts evaluate applications using our written guidelines.

Retail Installment Sale Contracts

The amount we pay for a retail installment sale contract is based on a negotiated vehicle purchase price agreed to between the dealer and the retail customer, plus any additional products, such as insurance and extended service plans, that are included in the contract, less any vehicle trade-in allowance or down payment from the customer applied to the purchase price. The net purchase price owed by the customer typically is paid over a specified number of months with interest at a fixed rate negotiated between the dealer and the retail customer. The dealer may retain a limited portion of the finance charge.

We offer a variety of retail installment sale financing products. In the United States, retail installment sale contract terms for new Ford, Lincoln and Mercury brand vehicles range primarily from 24 to 72 months. The average original term of our retail installment sale contracts was 58 months and 60 months in the United States for contracts purchased in 2009 and 2008, respectively. A small portion of our retail installment sale contracts have non-uniform payment periods and payment amounts to accommodate special cash flow situations. We also offer a retail balloon product in Europe under which the retail customer may finance their vehicle with an installment sale contract with a series of monthly payments followed by paying the amount remaining in a single balloon payment. The customer can satisfy the balloon payment obligation by payment in full of the amount owed, by refinancing the amount owed, or by returning the vehicle to us and paying additional charges for mileage and excess wear and use, if any. We sell vehicles returned to us to Ford and non-Ford dealers through auctions. Customers who choose our retail balloon product may also qualify for special-rate financing offers from Ford.

We hold a security interest in the vehicles purchased through retail installment sale contracts. This security interest provides us certain rights and protections. As a result, if our collection efforts fail to bring a delinquent customer’s payments current, we generally can repossess the customer’s vehicle, after satisfying local legal requirements, and sell it at auction. The customer typically remains liable for any deficiency between net auction proceeds and the defaulted contract obligations, including any repossession-related expenses. We require retail customers to carry fire, theft, and collision insurance on financed vehicles.

Item 1. Business (Continued)

Retail Lease Plans

We offer leasing plans to retail customers through our dealers. Our highest volume retail-leasing plan is called Red Carpet Lease, which is offered in North America through dealers of Ford, Lincoln and Mercury brands. We offer similar lease plans through Volvo dealers. Under these plans, dealers originate the leases and offer them to us for purchase. Upon our purchase of a lease, we take ownership of the lease and title to the leased vehicle from the dealer. After we purchase a lease from a dealer, the dealer generally has no further obligation to us in connection with the lease. The customer is responsible for properly maintaining the vehicle and is obligated to pay for excess wear and use as well as excess mileage, if any. At the end of the lease, the customer has the option to purchase the vehicle for the price specified in the lease contract, or return the vehicle to the dealer. If the customer returns the vehicle to the dealer, the dealer may buy the vehicle from us or return it to us. We sell vehicles returned to us to Ford and non-Ford dealers through auctions.

The amount we pay to a dealer for a retail lease, also called the acquisition cost, is based on the negotiated vehicle price agreed to by the dealer and the retail customer plus any additional products, such as insurance and extended service plans, that are included in the contract, less any vehicle trade-in allowance or down payment from the customer. The customer makes monthly lease payments based on the acquisition cost less the contractual residual value of the vehicle, plus lease charges. Some of our lease programs, such as our Red Carpet Lease Advance Payment Plan, provide certain pricing advantages to customers who make all or some monthly payments at lease inception or purchase refundable higher mileage allowances. We require lease customers to carry fire, theft, liability, and collision insurance on leased vehicles. In the case of a contract default and repossession, the customer typically remains liable for any deficiency between net auction proceeds and the defaulted contract obligations, including any repossession-related expenses.

In the United States, retail operating lease terms for new Ford, Lincoln and Mercury brand vehicles range primarily from 24 to 48 months. In 2009 and 2008, the average original lease term for contracts purchased was 37 months and 35 months, respectively.

Other Vehicle Financing

We offer vehicle-financing programs to commercial customers including leasing companies, daily rental companies, government entities and fleet customers. These financings include both lease plans and installment purchase plans and are primarily for terms of 24 to 60 months. The financing obligations are collateralized by perfected security interests on financed vehicles in almost all instances and, where appropriate, an assignment of rentals under any related leases. At the end of the finance term, a lease customer may be required to pay any shortfall between the fair market value and the specified end of term value of the vehicle. If the fair market value of the vehicle at the end of the finance term exceeds the specified end of term value, the lease customer may be paid the excess amount. These financings are included in retail finance receivables and net investment in operating leases in our financial statements. For certain commercial financing programs, we have alternative business arrangements whereby we provide marketing and sales support and funding is provided by a third party.

Item 1. Business (Continued)

Wholesale Financing

We offer a wholesale financing program for qualifying dealers to finance new and used vehicles held in inventory. We generally finance the vehicle’s wholesale invoice price for new vehicles and up to 100% of the dealer’s purchase price for used vehicles. Dealers generally pay a floating interest rate on wholesale loans. In the United States, the average wholesale receivable, excluding the time the vehicle was in transit from the assembly plant to the dealership, was outstanding for 72 days in 2009 compared with 73 days in 2008. Our wholesale financing program includes financing of large multi-brand dealer groups that are some of our largest wholesale customers based on the amount financed.

When a dealer uses our wholesale financing program to purchase vehicles we obtain a secured interest in the vehicles and, in many instances, other assets of the dealer. Our subsidiary, The American Road Insurance Company (“TARIC”), generally provides insurance for vehicle damage and theft of vehicles held in dealer inventory that are financed by us.

Other Financing

We make loans to dealers for improvements to dealership facilities, working capital and the purchase and financing of dealership real estate. These loans are included in other finance receivables in our financial statements. These loans typically are secured by mortgages on dealership real estate, secured interests in other dealership assets and sometimes personal guarantees from the individual owners of the dealership.

We also purchase certain receivables generated by divisions and affiliates of Ford, primarily in connection with the delivery of vehicle inventories from Ford, the sale of parts and accessories by Ford to dealers and the purchase of other receivables generated by Ford. These receivables are included in other finance receivables in our financial statements.

Marketing and Special Programs

We actively market our financing products and services to automotive dealers and customers. Through personal sales contacts, targeted advertisements in trade publications, participation in dealer-focused conventions and organizations, and support from manufacturers, we seek to demonstrate to dealers the value of entering into a business relationship with us. Our marketing strategy is based on our belief that we can better assist dealers in achieving their sales, financial, and customer satisfaction goals by being a stable, committed finance source with knowledgeable automotive and financial professionals offering personal attention and interaction. We demonstrate our commitment to dealer relationships with a variety of materials, measurements, and analyses showing the advantages of a full range of automotive financing products that allows consistent and predictable single source financing. From time to time, we promote increased dealer transactions through incentives, bonuses, contests, and selected program and rate adjustments.

We promote our retail financing products primarily through pre-approved credit offers to prospective customers, point-of-sale information, and ongoing communications with existing customers. Our communications to these customers promote the advantages of our financing products, the availability of special plans and programs, and the benefits of affiliated products, such as extended warranties, service plans, insurance coverage, gap protection, and excess wear and use waivers. We also emphasize the quality of our customer service and the ease of making payments and transacting business with us. For example, through our web site located at www.fordcredit.com, a customer can make inquiries, review an account balance, examine current incentives, schedule an electronic payment, or qualify for a pre-approved credit offer.

We also market our non-consumer financial services described above in “Other Vehicle Financing” with a specialized group of employees who make direct sales calls on dealers, and, often at the request of such dealers, on potential high-volume commercial customers. This group also uses various materials to explain our flexible programs and services specifically directed at the needs of commercial and fleet vehicle customers.

Item 1. Business (Continued)

Servicing

General. After we purchase retail installment sale contracts and leases from dealers and other customers, we manage the contracts during their contract terms. This management process is called servicing. We service the finance receivables and leases we originate and purchase. Our servicing duties include the following:

	•		applying monthly payments from customers;
	•		contacting delinquent customers for payment;
	•		maintaining a security interest in the financed vehicle;
	•		monitoring insurance coverage for lease vehicles in certain states;
	•		providing billing statements to customers;
	•		responding to customer inquiries;
	•		releasing the secured interest on paid-off finance contracts;
	•		arranging for the repossession of vehicles; and
	•		selling repossessed and returned vehicles at auction.

Customer Payment Operations. In the United States and Canada, customers are directed in their monthly billing statements to mail payments to a bank for deposit in a lockbox account. Customers may also make payments through electronic payment services, a direct debit program, or a telephonic payment system.

Servicing Activities — Consumer Credit. We design our collection strategies and procedures to keep accounts current and to collect on delinquent accounts. We employ a combination of proprietary and non-proprietary tools to assess the probability and severity of default for all of our receivables and leases and implement our collection efforts based on our determination of the credit risk associated with each customer. As each customer develops a payment history, we use an internally developed behavioral scoring model to assist in determining the best collection strategies. Based on data from this scoring model, we group contracts by risk category for collection. Our centralized collection operations are supported by auto-dialing technology and proprietary collection and workflow operating systems. Our United States systems also employ a web-based network of outside contractors who support the repossession process. Through our auto-dialer program and our monitoring and call log systems, we target our efforts on contacting customers about missed payments and developing satisfactory solutions to bring accounts current.

Supplier Operations. We engage vendors to perform many of our servicing processes. These processes include depositing monthly payments from customers, monitoring the perfection of security interests in financed vehicles, monitoring insurance coverage on lease vehicles in certain states, imaging of contracts and electronic data file maintenance, generating retail and lease billing statements, providing telephonic payment systems for retail customers, handling of some inbound customer service calls, handling of some inbound and outbound collections calls, and recovering deficiencies for selected accounts.

Payment Extensions. We may offer payment extensions to customers who have encountered temporary financial difficulty that limits their ability to pay as contracted. Each month about 1-2% of our U.S. retail contracts outstanding are granted payment extensions. A payment extension allows the customer to extend the term of the contract, usually by paying a fee that is calculated in a manner specified by law. Following a payment extension, the customer’s account is no longer delinquent. Before agreeing to a payment extension, the service representative reviews the customer’s payment history, current financial situation, and assesses the customer’s desire and capacity to make future payments. The service representative decides whether the proposed payment extension complies with our policies and guidelines. Regional business center managers review, and generally must approve, payment extensions outside these guidelines.

Repossessions and Auctions. We view repossession of a financed or leased vehicle as a final step that we undertake only after all other collection efforts have failed. We usually sell repossessed vehicles at auction and apply the proceeds to the amount owed on the customer’s account. We continue to attempt collection of any deficient amounts until the account is paid in full, we obtain mutually satisfactory payment arrangements with the debtor or we determine that the account is uncollectible.

We manage the sale of repossessed vehicles and returned leased vehicles. Repossessed vehicles are reported in other assets on our balance sheet at values that approximate expected net auction proceeds. We inspect and recondition the vehicle to maximize the net auction value of the vehicle. Repossessed vehicles are sold at open auctions. Returned leased vehicles are sold at open auctions, in which any licensed dealer can participate and at closed auctions, in which only Ford dealers may participate.

Item 1. Business (Continued)

Wholesale and Commercial. In the United States and Canada, we require dealers to submit monthly financial statements that we monitor for potential credit deterioration. We assign an evaluation rating to each dealer, which among other things determines the frequency of physical audits of vehicle inventory. We electronically audit vehicle inventory utilizing integrated systems allowing us to access information from Ford reported sales. We monitor dealer inventory financing payoffs daily to detect deviations from typical repayment patterns and take appropriate actions. We provide services to fleet purchasers, leasing companies, daily rental companies, and other commercial customers. We generally review our exposure under these credit arrangements at least annually. In our international markets, this business is governed by the respective regional offices, executed within the local markets, and similar risk management principles are applied.

Insurance

We conduct insurance operations primarily through TARIC in the United States and Canada and through various other insurance subsidiaries outside the United States and Canada. TARIC offers a variety of products and services, including:

	•		Contractual liability insurance on extended service contracts and, in the state of Florida, extended service plan contracts;
	•		Physical damage insurance covering vehicles at dealers’ locations and vehicles in-transit between final assembly plants and dealers’ locations; and
	•		Physical damage/liability reinsurance covering Ford dealer daily rental vehicles.

We also offer various Ford branded insurance products throughout the world underwritten by non-affiliated insurance companies from which we receive fee income but the underwriting risk remains with the non-affiliated insurance companies. In addition, TARIC has provided to Ford and its subsidiaries various types of surety bonds, including bonds generally required as part of any appeals of litigation, financial guarantee bonds, and self-insurance workers’ compensation bonds. Premiums from our insurance business generated approximately 1% of our total revenues in 2009 and 2008.

Employee Relations

Our full-time employees numbered approximately 8,200 and 10,200 at year-end 2009 and 2008, respectively. Most of our employees are salaried, and most are not represented by a union. We consider employee relations to be satisfactory.

Governmental Regulations

As a finance company, we are highly regulated by the governmental authorities in the locations where we operate.

United States

Within the United States, our operations are subject to regulation, supervision and licensing under various federal, state, and local laws and regulations.

Federal Regulation. We are subject to extensive federal regulation, including the Truth-in-Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act. These laws require us to provide certain disclosures to prospective purchasers and lessees in consumer retail and lease financing transactions and prohibit discriminatory credit practices. The principal disclosures required under the Truth-in-Lending Act for retail finance transactions include the terms of repayment, the amount financed, the total finance charge and the annual percentage rate. For retail lease transactions, we are required to disclose the amount due at lease inception, the terms for payment, and information about lease charges, insurance, excess mileage, wear and use charges, and liability on early termination. The Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants and customers on a variety of factors, including race, color, sex, age, or marital status. Pursuant to the Equal Credit Opportunity Act, creditors are required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for being denied. In addition, any of the credit scoring systems we use during the application process or other processes must comply with the requirements for such systems under the Equal Credit Opportunity Act. The Fair Credit Reporting

Item 1. Business (Continued)

Act requires us to provide certain information to consumers whose credit applications are not approved on the basis of a consumer credit report obtained from a national credit bureau and sets forth requirements related to identity theft, privacy, and enhanced accuracy in credit reporting content. We are also subject to the Servicemember’s Civil Relief Act that prohibits us from charging interest in excess of 6% on transactions with customers who subsequently enter into full-time service with the military and request such interest rate modification, and limits our ability to collect future payments from lease customers who terminate their lease early. In addition, we are subject to other federal regulation, including the Gramm-Leach-Bliley Act, that requires us to maintain confidentiality and safeguard certain consumer data in our possession and to communicate periodically with consumers on privacy matters.

State Regulation — Licensing. In most states, a consumer credit regulatory agency regulates and enforces laws relating to finance companies. Rules and regulations generally provide for licensing of finance companies, limitations on the amount, duration and charges, including interest rates that can be included in finance contracts, requirements as to the form and content of finance contracts and other documentation, and restrictions on collection practices and creditors’ rights. We must renew these licenses periodically. Moreover, several states have laws that limit interest rates on consumer financing. In periods of high interest rates, these rate limitations could have an adverse effect on our operations if we were unable to purchase retail installment sale contracts with finance charges that reflect our increased costs. In certain states, we are subject to periodic examination by state regulatory authorities.

State Regulation — Repossessions. To mitigate our credit losses, sometimes we repossess a financed or leased vehicle. Repossessions are subject to prescribed legal procedures, including peaceful repossession, one or more customer notifications, a prescribed waiting period prior to disposition of the repossessed vehicle, and return of personal items to the customer. Some states provide the customer with reinstatement rights that require us to return a repossessed vehicle to the customer in certain circumstances. Our ability to repossess and sell a repossessed vehicle is restricted if a customer declares bankruptcy.

International

In some countries outside the United States, some of our subsidiaries, including FCE, are regulated banking institutions and are required, among other things, to maintain minimum capital reserves. FCE is authorized as a deposit taking business and insurance intermediary under the Financial Services and Markets Act of 2000 and is regulated by the U.K. Financial Services Authority (“FSA”). FCE also holds a standard license under the U.K. Consumer Credit Act of 1974 and other licenses to conduct financing business in other European locations. Since 1993, FCE has obtained authorizations from the Bank of England (now the FSA) pursuant to the Banking Consolidation Directive entitling it to operate through a European branch network and operate branches in 11 countries. In many other locations where we operate, governmental authorities require us to obtain licenses to conduct our business.

Regulatory Compliance Status

We believe that we maintain all material licenses and permits required for our current operations and are in compliance with all material laws and regulations applicable to us and our operations. Failure to satisfy those legal and regulatory requirements could have a material adverse effect on our operations, financial condition, and liquidity. Further, the adoption of new laws or regulations, or the revision of existing laws and regulations, could have a material adverse effect on our operations, financial condition, and liquidity.

We actively monitor proposed changes to relevant legal and regulatory requirements in order to maintain our compliance. Through our governmental relations efforts, we also attempt to participate in the legislative and administrative rule-making process on regulatory initiatives that impact finance companies. The cost of our ongoing compliance efforts has not had a material adverse effect on our operations, financial condition, or liquidity.

Item 1. Business (Continued)

Transactions with Ford and Affiliates

On November 6, 2008, we and Ford entered into an Amended and Restated Support Agreement (“Support Agreement”) (formerly known as the Amended and Restated Profit Maintenance Agreement). Pursuant to the Support Agreement, if our managed leverage for a calendar quarter were to be higher than 11.5 to 1 (as reported in our most recent Form 10-Q Report or Form 10-K Report), we can require Ford to make or cause to be made a capital contribution to us in an amount sufficient to have caused such managed leverage to have been 11.5 to 1. A copy of the Support Agreement was filed as an exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008 and is incorporated by reference herein as an exhibit. No capital contributions have been made to us pursuant to the Support Agreement. In addition, we have an agreement to maintain FCE’s net worth in excess of $500 million. No payments have been made to FCE pursuant to the agreement during the 2007 through 2009 periods.

We entered into an Amended and Restated Agreement with Ford dated December 12, 2006 relating to our set-off arrangements and long-standing business practices with Ford, a copy of which was included in our Form 8-K dated the same date and is incorporated by reference herein as an exhibit. The principal terms of this agreement include the following:

	•		In certain circumstances, our obligations to Ford may be set-off against Ford’s obligations to us;
	•		Any extension of credit from us to Ford or any of Ford’s automotive affiliates will be on arm’s length terms and will be enforced by us in a commercially reasonable manner;
	•		We will not guarantee more than $500 million of the indebtedness of, make any investments in, or purchase any real property or manufacturing equipment classified as an automotive asset from Ford or any of Ford’s automotive affiliates;
	•		We and Ford agree to maintain our shareholder’s interest at a commercially reasonable level to support the amount, quality and mix of our assets taking into account general business conditions affecting us;
	•		We will not be required by Ford or any of Ford’s automotive affiliates to accept credit or residual risk beyond what we would be willing to accept acting in a prudent and commercially reasonable manner (taking into consideration any interest rate supplements or residual value support payments, guarantees, or other subsidies that are provided to us by Ford or any of Ford’s automotive affiliates); and
	•		We and Ford are separate, legally distinct companies, and we will continue to maintain separate books and accounts. We will prevent our assets from being commingled with Ford’s assets, and hold ourselves out as a separate and distinct company from Ford and Ford’s automotive affiliates.

More information about transactions between us and Ford and other affiliates is contained in Note 18 of our Notes to the Financial Statements, “Business — Overview”, “Business — Retail Financing”, “Business — Other Financing” and the description of Ford’s business in Exhibit 99.

ITEM 1A. RISK FACTORS

We have listed below (not necessarily in order of importance or probability of occurrence) the most significant risk factors applicable to us:

A Prolonged Disruption of the Debt and Securitization Markets — Government-sponsored securitization funding programs (e.g., the U.S. Federal Reserve’s Commercial Paper Funding Facility — “CPFF” and the U.S. Federal Reserve’s Term Asset-Backed Securities Loan Facility — “TALF”) intended to improve conditions in the capital markets are scheduled to expire in 2010. If, due to the expiration of such programs or otherwise, there is a prolonged disruption of the debt and securitization markets, we would consider further reducing the amount of receivables we purchase or originate. A significant reduction in the amount of receivables we purchase or originate would significantly reduce our ongoing profits, and could adversely affect our ability to support the sale of Ford vehicles. To the extent our ability to provide wholesale financing to Ford’s dealers or retail financing to those dealers’ customers is limited, Ford’s ability to sell vehicles would be adversely affected.

Inability to Access Debt, Securitization or Derivative Markets Around the World at Competitive Rates or in Sufficient Amounts due to Credit Rating Downgrades, Market Volatility, Market Disruption or Otherwise — The lower credit ratings assigned to us over the past several years have increased our unsecured borrowing costs and have caused our access to the unsecured debt markets to be more restricted. In response, we have increased our use of securitization transactions (including other structured financings) and other sources of funding. Our ability to obtain funding under our committed asset-backed liquidity programs and certain other asset-backed securitization transactions is subject to having a sufficient amount of assets eligible for these programs as well as our ability to obtain appropriate credit ratings and, for certain committed programs, derivatives to manage the interest rate risk. Over time, and particularly in the event of any credit rating downgrades, market volatility, market disruption, or other factors, we may need to reduce the amount of receivables we purchase or originate. In addition, we would need to reduce the amount of receivables we purchase or originate if there is a significant decline in the demand for the types of securities we offer or we are unable to obtain derivatives to manage the interest rate risk associated with our securitization transactions. A significant reduction in the amount of receivables we purchase or originate would significantly reduce our ongoing profits, and could adversely affect our ability to support the sale of Ford vehicles. For additional information on market risk, refer to the “Market Risk” section of Item 7A of Part II of our 10-K Report.

Higher-Than-Expected Credit Losses — Credit risk is the possibility of loss from a customer’s or dealer’s failure to make payments according to contract terms. Credit risk (which is heavily dependent upon economic factors, including unemployment, consumer debt service burden, personal income growth, dealer profitability, and used vehicle prices) has a significant impact on our business. Our credit losses could exceed our expectations and adversely affect our financial condition and results of operations.

Lower-Than-Anticipated Residual Values or Higher-Than-Expected Return Volumes for Leased Vehicles — We project expected residual values (including residual value support payments from Ford) and return volumes of the vehicles we lease. Actual proceeds realized by us upon the sale of returned leased vehicles at lease termination may be lower than the amount projected, which reduces the profitability of the lease transaction to us. Among the factors that can affect the value of returned lease vehicles are the volume of vehicles returned, economic conditions and the quality or perceived quality, safety or reliability of the vehicles. Actual return volumes may be higher than expected and can be influenced by contractual lease-end values relative to auction values, marketing programs for new vehicles, and general economic conditions. All of these, alone or in combination, have the potential to adversely affect our profitability.

Item 1A. Risk Factors (Continued)

Increased Competition from Banks or Other Financial Institutions Seeking to Increase Their Share of Financing Ford Vehicles — No single company is a dominant force in the automotive finance industry. Most of our bank competitors in the United States use credit aggregation systems that permit dealers to send, through standardized systems, retail credit applications to multiple finance sources to evaluate financing options offered by these finance sources. This process has resulted in greater competition based on financing rates. In addition, we may face increased competition on wholesale financing for Ford dealers. Competition from such competitors with lower borrowing costs may increase, which could adversely affect our profitability and the volume of our business.

Fluctuations in Foreign Currency Exchange Rates and Interest Rates — We are exposed to the effects of changes in foreign currency exchange rates and interest rates. Changes in currency exchange rates and interest rates cannot always be predicted or hedged. As a result, substantial unfavorable changes in foreign currency exchange rates or interest rates could have a substantial adverse effect on our financial condition and results of operation.

Collection and Servicing Problems Related to Our Finance Receivables and Net Investment in Operating Leases — After we purchase retail installment sale contracts and leases from dealers and other customers, we manage or service the receivables. Any disruption of our servicing activity, due to inability to access or accurately maintain our customer account records or otherwise, could have a significant negative impact on our ability to collect on those receivables and/or satisfy our customers.

New or Increased Credit, Consumer or Data Protection, or Other Regulations Could Result in Higher Costs and/or Additional Financing Restrictions — As a finance company, we are highly regulated by governmental authorities in the locations where we operate. In the United States, our operations are subject to regulation, supervision and licensing under various federal, state, and local laws and regulations, including the federal Truth-in-Lending Act, Equal Credit Opportunity Act, and Fair Credit Reporting Act. In some countries outside the United States, our subsidiaries are regulated banking institutions and are required, among other things, to maintain minimum capital reserves. In many other locations, governmental authorities require companies to have licenses in order to conduct financing businesses. Efforts to comply with these laws and regulations impose significant costs on us, and affect the conduct of our business. Additional regulation could add significant cost or operational constraints that might impair the profitability of our business.

Changes in Ford’s Operations or Changes in Ford’s Marketing Programs Could Result in a Decline in Our Financing Volumes — Most of our business consists of financing Ford vehicles and supporting Ford dealers. If there were significant changes in the production or sales of Ford vehicles to retail customers, the quality or resale value of Ford vehicles, or other factors impacting Ford or its employees, such changes could significantly affect our profitability and financial condition. In addition, for many years, Ford has sponsored special-rate financing programs available only through us. Under these programs, Ford makes interest supplements or other support payments to us. These programs increase our financing volume and share of financing sales of Ford vehicles. If Ford were to adopt marketing strategies in the future that de-emphasized such programs in favor of other incentives, our financing volume could be reduced.

Inability to Obtain Competitive Funding — Other institutions that provide automotive financing to certain of Ford’s competitors have access to relatively low-cost government-insured or other funding. For example, financial institutions with bank holding company status may have access to other lower cost sources of funding. Access by these competitors’ dealers and customers to financing provided by financial institutions with relatively low-cost funding that is not available to us could adversely affect our ability to support the sale of Ford vehicles at competitive cost and rates.

We Have Significant Exposure to Ford — At December 31, 2009, in the United States and Canada, Ford is obligated to pay us about $1 billion of interest supplements (including supplements related to sold receivables) and $180 million of residual value support payments over the terms of the related finance contracts and operating leases, compared with $2.5 billion of interest supplements and about $450 million of residual value support at December 31, 2008, in each case for contracts purchased prior to January 1, 2008. The interest supplements and residual value support payment obligations on these contracts will continue to decline as the contracts liquidate. In the event Ford is unable to pay, fails to pay or is delayed in paying these amounts or any other obligations to us, our profitability, financial condition, and cash flow could be adversely affected.

Item 1A. Risk Factors (Continued)

Failure of Financial Institutions to Fulfill Commitments Under Committed Credit and Liquidity Facilities — As included in the “Liquidity” section of Item 7 of Part II of our 10-K Report, at December 31, 2009, we had $33.8 billion of committed liquidity programs, asset-backed commercial paper, and credit facilities of which $18.3 billion were utilized leaving $15.5 billion available for use for which we pay commitment fees. To the extent the financial institutions that provide these committed facilities and programs were to default on their obligation to fund the commitments, these facilities and programs would not be available to us.

We are Jointly and Severally Responsible with Ford and its Other Subsidiaries for Funding Obligations Under Ford’s and its Subsidiaries’ Qualified U.S. Defined Benefit Pension Plans — Pursuant to the Employee Retirement Income Security Act of 1974 (“ERISA”), we are jointly and severally liable to the Pension Benefit Guaranty Corporation (“PBGC”) for certain Ford IRS-qualified U.S. defined benefit pension plan liabilities and to any trustee appointed if one or more of these pension plans were to be terminated by the PBGC in a distress termination. We are liable to pay any plan deficiencies and could have a lien placed on our assets by the PBGC to collateralize this liability. Our financial condition and ability to repay unsecured debt could be materially adversely affected if we were required to pay some or all of these obligations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

We have none to report.

ITEM 2. PROPERTIES

We own our world headquarters in Dearborn, Michigan. We lease our corporate offices in Brentwood, England, from an affiliate of Ford. Most of our automotive finance branches and business centers are located in leased properties. The continued use of any of these leased properties is not material to our operations. At December 31, 2009, our total future rental commitment under leases of real property was $76 million.

We operate in the United States through four regional business centers. Additionally, we operate in Canada through a service center and an origination center in Oakville, Ontario.

Our North American regional business and service centers are located in:

United States:		Colorado Springs, Colorado		Greenville, South Carolina
		Tampa, Florida		Nashville, Tennessee
Canada:		Edmonton, Alberta

Each of these centers generally services dealers and customers located within its region. All of our U.S. business centers are electronically linked and workload can be allocated across these centers. In addition, our Canadian service and origination centers share a similar electronic linkage and workload allocation capability.

We also have five specialty service centers in North America that focus on specific servicing activities:

	•		Customer Service Center — Omaha, Nebraska;
	•		Loss Prevention Centers — Henderson, Nevada and Irving, Texas;
	•		National Bankruptcy Service Center — Dearborn, Michigan; and
	•		National Recovery Center — Mesa, Arizona.

In Europe, we have dealer and customer servicing activities in St. Albans, England, to support our U.K. operations and customers, and in Cologne, Germany, to support our German operations and customers. In smaller countries, we provide servicing through our local branches.

ITEM 3. LEGAL PROCEEDINGS

We are subject to legal actions, governmental investigations, and other proceedings and claims relating to state and federal laws concerning finance and insurance, employment-related matters, personal injury matters, investor matters, financial reporting matters, and other contractual relationships. Some of these matters are class actions or matters where the plaintiffs are seeking class action status. Some of these matters may involve claims for compensatory, punitive or treble damages and attorneys’ fees in very large amounts, or request other relief which, if granted, would require very large expenditures. We have no significant pending legal proceedings.

Litigation is subject to many uncertainties and the outcome is not predictable. It is reasonably possible that matters could be decided unfavorably to us. Although the amount of liability at December 31, 2009 with respect to litigation matters cannot be ascertained, we believe that any resulting liability should not materially affect our operations, financial condition, and liquidity.

In addition, any litigation, investigation, proceeding or claim against Ford that results in Ford incurring significant liability, expenditures or costs could also have a material adverse affect on our operations, financial condition, and liquidity. For a discussion of pending significant cases against Ford, see Item 3 in Ford’s 2009 10-K Report.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Required.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

At December 31, 2009, all of our Shares were owned by Ford Holdings, LLC, a wholly owned subsidiary of Ford. We did not issue or sell any equity interests during 2009, and there is no market for our Shares. In 2009, we paid distributions of $1.5 billion, including cash and non-cash distributions. In 2008, we did not pay any distributions. Our Shares are pledged as collateral for Ford’s secured credit facilities.

ITEM 6. SELECTED FINANCIAL DATA

Not Required.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Our primary objective remains to profitably and consistently support the sale of Ford, Lincoln and Mercury vehicles. Meeting this objective in 2009 was more difficult due to: the adverse impact of the worldwide credit crisis on the capital markets; low consumer confidence; lower consumer spending and reduced vehicle demand; higher repossessions; and the impact of our declining receivables on our ability to maintain a competitive cost structure.

Despite these challenges, we have been able to fund our business and support the sale of Ford vehicles. We have accomplished this by: using our committed liquidity programs; accessing capital markets for securitization transactions, much of which were supported by government-sponsored funding programs in the United States and Europe, and unsecured debt issuances; reducing our receivables; maintaining consistent risk management practices; and restructuring our business to maintain a competitive cost structure.

The Challenging Economic Environment

Consistent with the overall market, we have been impacted by volatility and disruptions in the capital markets since August 2007, particularly the asset-backed securitization market where we obtain the majority of our funding. The recent global credit environment has presented many challenges, including reduced access to capital markets, increased credit spreads associated with our funding, higher renewal costs on our committed liquidity programs, reduced net proceeds from securitization transactions due to greater enhancements, shorter maturities in our public and private securitization transactions in certain circumstances, and reduced capacity to obtain derivatives to manage market risk, including interest rate risk, in our securitization programs.

While challenges remain, we saw improvement in the capital markets in the last three quarters of 2009 evidenced by improvement in market access and credit spreads, including: four unsecured debt issuances in the United States and one in Europe totaling about $5 billion with significantly improved U.S. credit spreads from the first to the most recent; increasingly tighter spreads on the triple-A rated classes of our U.S. retail securitization transactions; a non-TALF public retail securitization transaction in November 2009; two European public retail securitization transactions in the fourth quarter of 2009; our first public wholesale securitization transaction since 2006 in October 2009; a two-year committed lease facility in December 2009; and the sale of over $150 million of subordinated notes from our September 2009 public retail securitization transaction.

In the United States, low consumer confidence and high unemployment have contributed to lower consumer spending and reduced vehicle demand. Sales of new vehicles in the United States declined about 20% in 2009 compared with 2008.

Our Response

More than half of our funding during 2009 was completed through our committed liquidity programs and government-sponsored funding programs due to constrained public and private securitization markets. Most of our public securitization issuance in the United States during 2009 was eligible for TALF and we also utilized the CPFF commercial paper program and the European Central Bank (“ECB”) open market operations program. In 2009, we completed six TALF-eligible securitization transactions totaling $10.3 billion and structured two transactions that provided $1.2 billion of additional funding through the ECB open market operations program. Our reliance on CPFF declined throughout 2009 and our last outstanding issuance matured in September 2009. Since the third quarter of 2009, we significantly reduced the use of government-sponsored securitization funding programs as our access to the public and private securitization and unsecured markets continued to improve. For additional information on our use of these programs, refer to the “Funding” section of Item 7 of Part II of our 10-K Report.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Our funding requirements have decreased as managed receivables declined to $95 billion at December 31, 2009 from $118 billion at year-end 2008. In 2009, lower global automotive industry sales resulted in fewer purchases of retail installment sale and lease contracts. In addition, as part of our commitment to support the sale of Ford, Lincoln and Mercury brand vehicles, Jaguar, Land Rover, Mazda, and Volvo began to transition their financing to other sources. We also continued our strategy to execute divestitures and alternative business arrangements in certain international markets where securitization and other funding availability were limited. We will continue to explore alternative business arrangements and divestitures. For additional information on our divestitures, see Note 14 of our Notes to the Financial Statements.

We continue to maintain consistent risk management practices, and continuously strive to improve our origination and servicing capabilities. For our retail and lease business, we use our risk management experience to test large sample sizes in developing proprietary origination scoring models which outperform generic scoring models. Our collection models evaluate several factors, including origination characteristics, updated credit bureau data, and historical payment patterns. These models allow for more focused collection activity on higher risk accounts and further refine our risk-based staffing model to ensure collection resources are aligned with portfolio risk. The credit quality of our retail and lease originations remains high and our servicing practices remain sound. For our wholesale and dealer loan business, lower industry sales in the first half of 2009 had a significant adverse effect on dealer profitability and creditworthiness. Although market conditions remained challenging in the second half of 2009, there was some improvement in dealer financial performance. Our proprietary commercial risk scorecards use historical experience to predict a dealer’s ability to meet its financial obligations. Our scorecards are reviewed annually and continue to be highly predictive in the segmentation of dealer risk. In 2009, to improve our monthly monitoring process performed on all dealers, we developed a statistically driven monthly monitoring scorecard allowing more rapid identification of deteriorating dealer performance.

We are also taking steps to maintain a competitive cost structure. In 2009, we eliminated about 1,200 U.S. staff and agency positions within our servicing, sales, and central operations. In February 2010, we announced to our employees our plan to continue to reduce our staffing requirements in our U.S. operations to meet changing business conditions, including the decline in our receivables. We plan to eliminate about 1,000 additional staff and agency positions, or about 20% of our U.S. staff. The reductions will occur in 2010 through attrition, retirements, and involuntary separations. Restructuring in locations outside of the United States will continue as appropriate.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations

Generation of Revenue, Income and Cash

The principal factors that influence our earnings are the amount and mix of finance receivables and net investment in operating leases and financing margins. The performance of these receivables and leases over time, mainly through the impact of credit losses and variations in the residual value of leased vehicles, also affects our earnings.

The amount of our finance receivables and net investment in operating leases depends on many factors, including:

	•		the volume of new and used vehicle sales and leases;
	•		the extent to which we purchase retail installment sale and lease contracts and the extent to which we provide wholesale financing;
	•		the sales price of the vehicles financed;
	•		the level of dealer inventories;
	•		Ford-sponsored special-rate financing programs available exclusively through us; and
	•		the availability of cost-effective funding for the purchase of retail installment sale and lease contracts and to provide wholesale financing.

For finance receivables, financing margin equals the difference between revenue earned on finance receivables and the cost of borrowed funds. For operating leases, financing margin equals revenue earned on operating leases, less depreciation expense and the cost of borrowed funds. Interest rates earned on most receivables and rental charges on operating leases generally are fixed at the time the contracts are originated. On some receivables, primarily wholesale financing, we charge interest at a floating rate that varies with changes in short-term interest rates.

Business Performance

We review our business performance from several perspectives, including:

	•		On-balance sheet basis — includes the receivables and leases we own and securitized receivables and leases that remain on our balance sheet (includes other structured financings and factoring transactions that have features similar to securitization transactions);
	•		Securitized off-balance sheet basis — includes receivables sold in securitization transactions that, when sold, do not remain on our balance sheet;
	•		Managed basis — includes on-balance sheet receivables, excluding unearned interest supplements related to finance receivables, and securitized off-balance sheet receivables that we continue to service (off-balance sheet retail receivables were about $100 million at December 31, 2009); and
	•		Serviced basis — includes managed receivables and leases, and receivables sold in whole-loan sale transactions where we retain no interest in the sold receivables, but which we continue to service.

We analyze our financial performance primarily on a managed and on-balance sheet basis. We retain interests in receivables sold in off-balance sheet securitization transactions and, with respect to subordinated retained interests, we have credit risk. As a result, we evaluate credit losses, receivables, and leverage on a managed basis as well as on an on-balance sheet basis. In contrast, we do not have the same financial interest in the performance of receivables sold in whole-loan sale transactions, and as a result, we generally review the performance of our serviced portfolio only to evaluate the effectiveness of our origination and collection activities. To evaluate the performance of these activities, we monitor a number of measures, such as delinquencies, repossession statistics, losses on repossessions, and the number of bankruptcy filings.

We measure the performance of our North America Segment and our International Segment primarily on an income before income taxes basis, after excluding the impact to earnings from gains and losses related to market valuation adjustments to derivatives primarily related to movements in interest rates, because our risk management activities are carried out on a centralized basis at the corporate level, with only certain elements allocated to our two segments. For additional information regarding our segments, see Note 19 of our Notes to the Financial Statements.

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Full Year 2009 Compared with Full Year 2008

In 2009, our net income was $1.3 billion, compared with a net loss of $1.5 billion in 2008. On a pre-tax basis, we earned $2 billion in 2009, compared with a loss of $2.6 billion in 2008. The improvement in pre-tax earnings primarily reflected:

	•		The non-recurrence of the 2008 impairment charge to our North America Segment operating lease portfolio for contracts terminating beginning third quarter of 2008 (about $2.1 billion);
	•		Lower depreciation expense for leased vehicles and lower residual losses on returned vehicles due to higher auction values (about $1.9 billion);
	•		A lower provision for credit losses primarily related to non-recurrence of higher severity offset partially by higher repossessions (about $800 million);
	•		The non-recurrence of net losses related to market valuation adjustments to derivatives, shown as unallocated risk management in the table below ($367 million);
	•		Net gains related to unhedged currency exposure primarily from cross-border intercompany lending (about $300 million);
	•		Lower net operating costs (about $200 million); and
	•		Higher financing margin primarily attributable to lower borrowing costs (about $100 million).

These factors were offset partially by:

	•		Lower volume primarily reflecting lower industry volumes, lower dealer stocks, the impact of divestitures and alternative business arrangements, and changes in currency exchange rates (about $1 billion);
	•		The non-recurrence of the gain related to the sale of approximately half of our ownership interest in our Nordic operations (about $100 million); and
	•		A valuation allowance for Australian finance receivables sold in 2009 (about $50 million).

For additional information on the 2008 impairment charge, refer to the “Results of Operations — Impairment of Net Investment in Operating Leases” section of Item 7 of Part II of our 10-K Report.

Results of our operations by business segment and unallocated risk management for 2009 and 2008 are shown below:

		Full Year
										2009
										Over/(Under)
		2009				2008				2008
		(in millions)
Income/(Loss) before income taxes
North America Segment		$	1,905			$	(2,749	)		$	4,654
International Segment			46				507				(461	)
Unallocated risk management			50				(317	)			367
Income/(Loss) before income taxes			2,001				(2,559	)			4,560
Provision for/(Benefit from) income taxes and Gain on disposal of discontinued operations			722				(1,023	)			1,745
Net income/(loss)		$	1,279			$	(1,536	)		$	2,815

The improvement in North America Segment pre-tax earnings primarily reflected non-recurrence of the impairment charge for operating leases, lower depreciation expense for leased vehicles and lower residual losses on returned vehicles due to higher auction values, a lower provision for credit losses, net gains related to unhedged currency exposure from cross-border intercompany lending, higher financing margin, and lower operating costs. These factors were offset partially by lower volume.

The decrease in International Segment pre-tax earnings primarily reflected lower volume, a higher provision for credit losses primarily reflecting losses in Spain and Germany, lower financing margin primarily in Mexico, non-recurrence of a gain related to the sale of approximately half of our ownership interest in our Nordic operations, and a valuation allowance for Australian finance receivables sold in 2009. These factors were offset partially by lower operating costs.

The change in unallocated risk management income reflected the non-recurrence of net losses related to market valuation adjustments to derivatives primarily related to movements in interest rates. For additional information on our unallocated risk management, see Note 19 of our Notes to the Financial Statements.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Full Year 2008 Compared with Full Year 2007

Impairment of Net Investment in Operating Leases. During the second quarter of 2008, higher fuel prices and the weak economic climate in North America resulted in a pronounced shift in consumer preferences from full-size trucks and traditional sport utility vehicles to smaller, more fuel-efficient vehicles. This shift in consumer preferences combined with a weak economic climate caused a significant reduction in auction values, in particular for used full-size trucks and traditional sport utility vehicles. At the end of the quarter, we completed our quarterly North America operating lease portfolio adequacy study for accumulated depreciation and projected that lease-end residual values would be significantly lower than previously expected for full-size trucks and traditional sport utility vehicles.

As a result of the market factors and our adequacy study results, we tested the operating leases of our North America Segment for recoverability as of June 30, 2008 and recorded a pre-tax impairment charge of $2.1 billion in Depreciation on vehicles subject to operating leases representing the amount by which the carrying value of certain vehicle lines, primarily full-size trucks and traditional sport utility vehicles, in our lease portfolio exceeded their fair value.

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

In 2008, our net loss was $1.5 billion, compared with net income of $775 million in 2007. On a pre-tax basis, we incurred a loss of $2.6 billion in 2008, compared with earnings of $1.2 billion in 2007. The decrease in pre-tax earnings primarily reflected the significant decline in used vehicle auction values during 2008. This decline in auction values contributed to:

	•		An impairment charge to our North America Segment operating lease portfolio for contracts terminating beginning third quarter of 2008 (about $2.1 billion);
	•		A higher provision for credit losses (about $1.2 billion); and
	•		Higher depreciation expense for leased vehicles (about $700 million).

Other factors to explain the decrease in pre-tax earnings included:

	•		Lower volume primarily related to lower average receivables (about $300 million);
	•		Higher net losses related to market valuation adjustments to derivatives ($209 million); and
	•		The non-recurrence of the gain related to the sale of a majority of our interest in AB Volvofinans (about $100 million);

These factors were offset partially by:

	•		Higher financing margin primarily attributable to lower borrowing costs (about $200 million);
	•		The non-recurrence of costs associated with our North American business transformation initiative (about $200 million);
	•		Lower expenses primarily reflecting improved operating costs (about $300 million); and
	•		A gain related to the sale of approximately half of our ownership interest in our Nordic operations (about $100 million).

Results of our operations by business segment and unallocated risk management for 2008 and 2007 are shown below:

		Full Year
										2008
										Over/(Under)
		2008				2007				2007
		(in millions)
Income/(Loss) before income taxes
North America Segment		$	(2,749	)		$	701			$	(3,450	)
International Segment			507				622				(115	)
Unallocated risk management			(317	)			(108	)			(209	)
Income/(Loss) before income taxes			(2,559	)			1,215				(3,774	)
Provision for/(Benefit from) income taxes and Gain on disposal of discontinued operations			(1,023	)			440				(1,463	)
Net income/(loss)		$	(1,536	)		$	775			$	(2,311	)

The decrease in North America Segment pre-tax earnings primarily reflected the second quarter 2008 impairment charge for operating leases, a higher provision for credit losses, higher depreciation expense for leased vehicles, and lower contract volume. These factors were offset partially by higher financing margin, the non-recurrence of costs associated with our business transformation initiative, and lower expenses primarily reflecting improved operating costs.

The decrease in International Segment pre-tax earnings primarily reflected lower volume and financing margin, a higher provision for credit losses, the non-recurrence of a gain related to the sale of a majority of our interest in AB Volvofinans, and higher reserves for residual based products, offset partially by gains related to the sale of our ownership interests in several operations, lower operating costs, and changes in currency exchange rates.

The change in unallocated risk management income reflected higher net losses related to market valuation adjustments to derivatives primarily related to movements in interest rates. For additional information on our unallocated risk management, see Note 19 of our Notes to the Financial Statements.

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Placement Volume and Financing Share

Total worldwide financing contract placement volumes for new and used vehicles are shown below:

		Full Year
		2009				2008				2007
		(in thousands)
North America Segment
United States			591				1,043				1,256
Canada			85				149				186
Total North America Segment			676				1,192				1,442
International Segment
Europe			468				629				696
Other international			49				129				207
Total International Segment			517				758				903
Total contract placement volume			1,193				1,950				2,345

Shown below are our financing shares of new Ford, Lincoln and Mercury brand vehicles sold by dealers in the United States and new Ford brand vehicles sold by dealers in Europe. Also shown below are our wholesale financing shares of new Ford, Lincoln and Mercury brand vehicles acquired by dealers in the United States, excluding fleet, and of new Ford brand vehicles acquired by dealers in Europe:

		Full Year
		2009				2008				2007
United States
Financing share — Ford, Lincoln and Mercury
Retail installment and lease			29	%			39	%			38	%
Wholesale			79				77				78
Europe
Financing share — Ford
Retail installment and lease			28	%			28	%			26	%
Wholesale			99				98				96

North America Segment

In 2009, our total contract placement volumes were 676,000, down 516,000 contracts from a year ago. This decrease primarily reflected lower sales of new Ford, Lincoln and Mercury vehicles, due to lower U.S. industry volumes and lower Ford, Lincoln and Mercury financing share, and the transition of Jaguar, Land Rover, and Mazda financing to other finance providers. Lower Ford, Lincoln and Mercury financing share was primarily explained by changes in Ford’s marketing programs and our reduction in leasing.

International Segment

In 2009, our total contract placement volumes were 517,000, down 241,000 contracts from a year ago. This decrease primarily reflected lower industry volumes, the transition of Jaguar, Land Rover, and Mazda financing to other finance providers, a planned financing share reduction in Spain, the discontinuation of retail originations in Australia, and the divestiture of our Japan operations.

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Financial Condition

Finance Receivables and Operating Leases

Our finance receivables and operating leases are shown below:

		December 31,
		2009				2008				2007
		(in billions)
Receivables — On-Balance Sheet
Finance receivables
North America Segment
Retail installment		$	42.3			$	49.5			$	52.2
Wholesale			13.3				14.0				18.6
Other			1.9				2.2				2.6
Total North America Segment — finance receivables			57.5				65.7				73.4
International Segment
Retail installment			14.0				16.0				22.0
Wholesale			9.1				13.7				16.2
Other			0.5				0.6				0.8
Total International Segment — finance receivables			23.6				30.3				39.0
Unearned interest supplements			(1.9	)			(1.3	)			—
Allowance for credit losses			(1.3	)			(1.4	)			(1.0	)
Finance receivables, net			77.9				93.3				111.4
Net investment in operating leases			14.6				22.5				29.7
Total receivables — on-balance sheet (a)(b)		$	92.5			$	115.8			$	141.1
Memo:
Total receivables — managed (c)		$	94.5			$	117.7			$	147.1
Total receivables — serviced (d)			94.6				118.0				148.0

Receivables decreased from year-end 2008, primarily reflecting lower industry volumes, lower dealer stocks, and the transition of Jaguar, Land Rover, and Mazda financing to other finance providers. In 2009, as part of our commitment to support the sale of Ford, Lincoln and Mercury brand vehicles, Volvo began to transition its financing to other sources. At December 31, 2009, the Jaguar, Land Rover, and Mazda financing portfolio represented 7% of our managed receivables and the Volvo financing portfolio represented 5% of our managed receivables. These percentages will decline over time.

As of January 1, 2008, Ford began paying interest supplements and residual value support to us at the time we purchase eligible contracts from dealers. The amount of unearned interest supplements for finance receivables was $1.9 billion at December 31, 2009, compared with $1.3 billion at December 31, 2008 included in Finance receivables, net and the amount of unearned interest supplements and residual support payments for net investment in operating leases was $1.1 billion at December 31, 2009, compared with $1.3 billion at December 31, 2008 included in Other liabilities and deferred income.

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

At December 31, 2009, in the United States and Canada, Ford is obligated to pay us about $1 billion of interest supplements and $180 million of residual value support payments over the terms of the related finance contracts and operating leases, compared with $2.5 billion of interest supplements and about $450 million of residual value support at December 31, 2008, in each case for contracts purchased prior to January 1, 2008. The unpaid interest supplements and residual value support payment obligations on these contracts will continue to decline as the contracts liquidate. For additional information on our finance receivables and net investment in operating leases, see Notes 4, 5, and 18 of our Notes to the Financial Statements.

Credit Risk

Credit risk is the possibility of loss from a customer’s or dealer’s failure to make payments according to contract terms. Credit risk has a significant impact on our business. We actively manage the credit risk of our retail installment and lease and wholesale and dealer loan portfolios to balance our level of risk and return. The allowance for credit losses included on our balance sheet is our estimate of the probable credit losses inherent in receivables and leases at the date of our balance sheet. Consistent with our normal practices and policies, we assess the adequacy of our allowance for credit losses quarterly and regularly evaluate the assumptions and models used in establishing the allowance.

In purchasing retail finance and lease contracts, we use a proprietary scoring system that classifies contracts using several factors, such as credit bureau information, credit bureau scores (e.g., FICO score), customer characteristics, and contract characteristics. In addition to our proprietary scoring system, we consider other factors, such as employment history, financial stability, and capacity to pay. As of December 31, 2009, about 5% of the outstanding U.S. retail finance and lease contracts in our serviced portfolio were classified as high risk at contract inception, slightly higher than year-end 2008 of about 4%. This increase primarily reflects a lower percentage of lease contracts in our retail portfolio. Lease contracts generally include shorter average terms and higher average FICO scores compared with retail installment sale contracts.

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Credit Loss Metrics

Worldwide

The following table shows worldwide charge-offs (credit losses, net of recoveries) for the various categories of financing during the periods indicated. The loss-to-receivables ratios, which equal charge-offs on an annualized basis divided by the average amount of receivables outstanding for the period, excluding the allowance for credit losses and unearned interest supplements related to finance receivables, are shown below.

		Full Year
		2009				2008				2007
		(in millions)
Charge-offs — On-Balance Sheet
Retail installment and lease		$	989			$	1,089			$	608
Wholesale			94				29				17
Other			12				17				7
Total charge-offs — on-balance sheet		$	1,095			$	1,135			$	632
Loss-to-Receivables Ratios — On-Balance Sheet
Retail installment and lease			1.25	%			1.10	%			0.60	%
Wholesale			0.45				0.09				0.05
Total loss-to-receivables ratio (including other) — on-balance sheet			1.07	%			0.84	%			0.46	%
Memo:
Total charge-offs — managed (in millions)		$	1,100			$	1,166			$	697
Total loss-to-receivables ratio (including other) — managed			1.07	%			0.84	%			0.47	%

Most of our charge-offs are related to retail installment sale and lease contracts. Charge-offs depend on the number of vehicle repossessions, the unpaid balance outstanding at the time of repossession, the auction price of repossessed vehicles, and other charge-offs. We also incur credit losses on our wholesale loans, but default rates for these receivables historically have been substantially lower than those for retail installment sale and lease contracts.

Charge-offs decreased from a year ago reflecting lower losses in the United States, offset partially by higher losses in Europe. Charge-offs in the United States decreased due to lower severity and lower other charge-offs, offset partially by higher repossessions. The charge-off increase in Europe primarily reflected higher losses in Spain and Germany. Loss-to-receivables ratios increased from a year ago primarily reflecting a combination of lower average receivables, higher repossessions in the United States, and higher losses in Spain and Germany. For additional information on severity, refer to the “Critical Accounting Estimates — Allowance for Credit Losses” section of Item 7 of Part II of our 10-K Report.

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

U.S. Ford, Lincoln and Mercury Brand Retail Installment and Operating Lease

The following table shows the credit loss metrics for our Ford, Lincoln and Mercury brand U.S. retail installment sale and operating lease portfolio. This portfolio was 64% of our worldwide on-balance sheet portfolio of retail installment receivables and net investment in operating leases at December 31, 2009. Trends and causal factors are consistent with the worldwide results, with repossessions up 13,000 units in 2009 from a year ago, reflecting the weak economic environment. Severity was lower by $1,600 per unit from a year ago, mainly due to improvements in auction values in the used vehicle market.

		Full Year
		2009				2008				2007
On-Balance Sheet
Charge-offs (in millions)		$	635			$	775			$	431
Loss-to-receivables ratio			1.32	%			1.36	%			0.74	%
Other Metrics — Serviced
Repossessions (in thousands)			94				81				74
Repossession ratio (a)			3.01	%			2.30	%			1.89	%
Severity (b)		$	8,300			$	9,900			$	7,400
New bankruptcy filings (in thousands)			47				37				27
Over-60 day delinquency ratio (c)			0.24	%			0.24	%			0.19	%
Memo:
Charge-offs — managed (in millions)		$	637			$	796			$	474
Loss-to-receivables ratio — managed			1.32	%			1.35	%			0.73	%

Allowance for Credit Losses

Our allowance for credit losses and our allowance for credit losses as a percentage of end-of-period receivables (finance receivables, excluding unearned interest supplements, and net investment in operating leases, excluding the allowance for credit losses) for our on-balance sheet portfolio are shown below. A description of our allowance setting process is provided in the “Critical Accounting Estimates — Allowance for Credit Losses” section of Item 7 of Part II of our 10-K Report.

		December 31,
		2009				2008				2007
		(in millions)
Allowance for Credit Losses
Retail installment and lease		$	1,479			$	1,610			$	1,026
Wholesale			43				55				58
Other			27				3				6
Total allowance for credit losses		$	1,549			$	1,668			$	1,090
As a Percentage of End-of-Period Receivables
Retail installment and lease			2.08	%			1.82	%			0.99	%
Wholesale			0.19				0.20				0.17
Total including other			1.61	%			1.40	%			0.77	%

The allowance for credit losses is estimated using a combination of models and management judgment, and is based on such factors as portfolio quality, historical loss performance, and receivable levels. Our allowance for credit losses decreased from 2008, primarily reflecting the decline in receivables and decrease in charge-offs. At December 31, 2009, our allowance for credit losses included about $215 million, which was based on management’s judgment regarding higher retail installment and lease repossession assumptions and higher wholesale and dealer loan default assumptions compared with historical trends used in our models. At December 31, 2008, our allowance for credit losses included about $210 million, which was based on management’s judgment regarding higher severity assumptions. At December 31, 2007, our allowance for credit losses did not include any incremental amounts based on management judgment. The credit quality of our retail and lease originations remains high.

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Residual Risk

We are exposed to residual risk on operating leases and similar balloon payment products where the customer may return the financed vehicle to us. Residual risk is the possibility that the amount we obtain from returned vehicles will be less than our estimate of the expected residual value for the vehicle. We estimate the expected residual value by evaluating recent auction values, return volumes for our leased vehicles, industry-wide used vehicle prices, marketing incentive plans, and vehicle quality data.

For additional information on our residual risk on operating leases, refer to the “Critical Accounting Estimates — Accumulated Depreciation on Vehicles Subject to Operating Leases” section of Item 7 of Part II of our 10-K Report.

North America Retail Operating Lease Experience

We use various statistics to monitor our residual risk:

	•		Placement volume measures the number of leases we purchase in a given period;
	•		Termination volume measures the number of vehicles for which the lease has ended in the given period; and
	•		Return volume reflects the number of vehicles returned to us by customers at lease-end.

The following table shows operating lease placement, termination, and return volumes for our North America Segment, which accounted for 98% of our total investment in operating leases at December 31, 2009:

		Full Year
		2009				2008				2007
		(in thousands)
Placements			67				317				484
Terminations			386				381				378
Returns			314				327				300
Memo:
Return rates			81	%			86	%			79	%

In 2009, placement volumes were down 250,000 units compared with 2008, primarily reflecting changes in Ford’s marketing programs that emphasized retail installment sale contracts, lower industry volumes, and the transition of Jaguar, Land Rover, and Mazda financing to other finance providers. Termination volumes increased by 5,000 units compared with last year, reflecting higher placement volumes in 2006 and 2007. Return volumes decreased 13,000 units compared with last year, primarily reflecting lower return rates, consistent with improved auction values relative to our expectations of lease-end values at the time of contract purchase.

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

U.S. Ford, Lincoln and Mercury Brand Retail Operating Lease Experience

The following table shows return volumes for our Ford, Lincoln and Mercury brand U.S. operating lease portfolio. Also included are auction values at constant fourth quarter 2009 vehicle mix for lease terms comprising 59% of our active Ford, Lincoln and Mercury brand U.S. operating lease portfolio:

		Full Year
		2009				2008				2007
		(in thousands)
Returns
24-Month term			60				88				85
36-Month term			65				61				58
39-Month/Other term			34				19				34
Total returns			159				168				177
Memo:
Return rates			78	%			88	%			83	%
Auction Values at Constant Fourth Quarter 2009 Vehicle Mix
24-Month term		$	18,670			$	16,310			$	17,635
36-Month term			13,365				12,015				14,105

In 2009, Ford, Lincoln and Mercury brand U.S. return volumes were down 9,000 units compared with 2008, primarily reflecting a lower return rate, down ten percentage points to 78%, consistent with improved auction values relative to our expectations of lease-end values at the time of contract purchase. Auction values at constant fourth quarter 2009 mix were up $2,360 per unit from 2008 levels for vehicles under 24-month leases, and up $1,350 for vehicles under 36-month leases, primarily reflecting the overall auction value improvement in the used vehicle market. We expect future auction values to remain volatile.

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Credit Ratings

Our short-term and long-term debt is rated by four credit rating agencies designated as nationally recognized statistical rating organizations (“NRSROs”) by the SEC:

	•		DBRS Limited (“DBRS”);
	•		Fitch, Inc. (“Fitch”);
	•		Moody’s Investors Service, Inc. (“Moody’s”); and
	•		Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. (“S&P”).

In several markets, locally recognized rating agencies also rate us. A credit rating reflects an assessment by the rating agency of the credit risk associated with particular securities we issue, based on information provided by Ford, other sources, and us. Credit ratings are not recommendations to buy, sell, or hold securities and are subject to revision or withdrawal at any time by the assigning rating agency. Each rating agency may have different criteria for evaluating company risk and, therefore, ratings should be evaluated independently for each rating agency. Lower credit ratings generally result in higher borrowing costs and reduced access to capital markets. Credit ratings assigned to us from all of the NRSROs are closely associated with their opinions on Ford.

The following chart summarizes long-term senior unsecured credit ratings, short-term credit ratings, and the outlook assigned to us since January 2007 by these four NRSROs:

NRSRO RATINGS

DBRS

Fitch

Moody’s

S&P

Long-

Short-

Long-

Short-

Long-

Short-

Long-

Short-

Date

Term

Term

Trend

Term

Term

Outlook

Term

Term

Outlook

Term*

Term

Outlook

Jan. 2007

B

R-4

Negative

BB-

B

Negative

B1

NP

Negative

B

B-3

Negative

Nov. 2007

B

R-4

Stable

BB-

B

Negative

B1

NP

Stable

B

B-3

Stable

June 2008

B

R-4

Negative

BB-

B

Negative

B1

NP

Negative

B

B-3

Negative

July 2008

B

R-4

Negative

BB-

B

Negative

B1

NP

Negative

B-

NR

Negative

Aug. 2008

B

R-4

Negative

B+

B

Negative

B1

NP

Negative

B-

NR

Negative

Oct. 2008

B

R-4

Negative

B-

C

Negative

B2

NP

Negative

B-

NR

Negative

Nov. 2008

B (low)

R-5

Negative

B-

C

Negative

B3

NP

Negative

CCC+

NR

Negative

Dec. 2008

B (low)

R-5

Negative

B-

C

Negative

Caa1

NP

Negative

CCC+

NR

Negative

July 2009

B (low)

R-5

Negative

B-

C

Negative

Caa1

NP

Negative

CCC+

NR

Developing

Aug. 2009

B (low)

R-5

Stable

B

C

Stable

Caa1

NP

Negative

CCC+

NR

Developing

Sep. 2009

B (low)

R-5

Stable

B

C

Stable

Caa1

NP

Review

CCC+

NR

Developing

Nov. 2009

B (low)

R-5

Positive

B

C

Positive

B3

NP

Review

B-

NR

Stable

Dec. 2009

B

R-5

Stable

B

C

Positive

B3

NP

Review

B-

NR

Stable

Jan. 2010

B

R-5

Stable

B+

B

Positive

B3

NP

Review

B-

NR

Stable

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Funding

Overview

Our funding strategy is to maintain sufficient liquidity to meet short-term funding obligations by having a substantial cash balance and committed funding capacity. As a result of lower long-term senior unsecured credit ratings assigned to us over the past few years, our unsecured funding costs have increased over time. While we have accessed the unsecured debt market when available, we have increased our use of securitization funding as this has been more cost effective than unsecured funding and has allowed us access to a broader investor base. We plan to meet a significant portion of our 2010 funding requirements through securitization transactions. In addition, we have various alternative business arrangements for select products and markets that reduce our funding requirements while allowing us to support Ford (e.g., our partnering in Brazil for retail financing and FCE’s partnering with various institutions in Europe for full service leasing and retail and wholesale financing). We are continuing to explore and execute such alternative business arrangements. We also have an application pending for Federal Deposit Insurance Corporation (“FDIC”) and State of Utah approval for an industrial loan corporation (“ILC”) that could provide a limited source of funding.

Consistent with the overall market, we have been impacted by volatility and disruptions in the asset-backed securitization market since August 2007. The recent global credit environment has presented many challenges, including reduced access to public and private unsecured and securitization markets, increased credit spreads associated with both asset-backed and unsecured funding, higher renewal costs on our committed liquidity programs, reduced net proceeds from securitization transactions due to greater enhancements, shorter maturities in our public and private securitization transactions in certain circumstances, and reduced capacity to obtain derivatives to manage market risk, including interest rate risk, in our securitization programs.

While challenges remain, we saw improvement in the capital markets in the last three quarters of 2009 evidenced by improvement in market access and credit spreads, including: four unsecured debt issuances in the United States and one in Europe totaling about $5 billion with significantly improved U.S. credit spreads from the first to the most recent; increasingly tighter spreads on the triple-A rated classes of our U.S. retail securitization transactions; a non-TALF public retail securitization transaction in November 2009; two European public retail securitization transactions in the fourth quarter of 2009; our first public wholesale securitization transaction since 2006 in October 2009; a two-year committed lease facility in December 2009; and the sale of over $150 million of subordinated notes from our September 2009 public retail securitization transaction.

During 2009, 70% of our committed capacity, as of December 31, 2008, was up for renewal of which we renewed 63%. During the second half of 2009, we renewed 83% of the capacity up for renewal, which was higher than the first half of 2009 renewal rate of 52%. The renewals also required significantly higher spreads, which tightened throughout the year. About 74% of our committed capacity, as of December 31, 2009, is up for renewal in 2010 and 6% is up for renewal in the first quarter of 2010. Most of our asset-backed committed facilities enable us to obtain term funding up to the time that the facilities mature. Any outstanding debt at the maturity of the facilities remains outstanding and is repaid as underlying assets liquidate. Our ability to obtain funding under our committed asset-backed liquidity programs is subject to having a sufficient amount of assets eligible for these programs as well as our ability to obtain derivatives to manage the interest rate risk. For additional information on our committed capacity programs, refer to the “Liquidity” section of Item 7 of Part II of our 10-K Report.

Our funding plan is subject to risks and uncertainties, many of which are beyond our control, including disruption in the capital markets for the types of asset-backed securities used in our asset-backed funding as well as disruption beyond the expiration of the government-sponsored securitization funding programs. Potential impacts of industry events on our ability to access debt and derivatives markets or renew our committed liquidity programs in sufficient amounts and at competitive rates represent another risk to our funding plan. As a result, we may need to further reduce the amount of finance receivables and operating leases we purchase or originate, thereby reducing our ongoing profits and adversely affecting our ability to support the sale of Ford vehicles.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Funding Sources

Our funding sources include primarily securitization transactions (including other structured financings) and unsecured debt. We issue both short- and long-term debt that is held by both institutional and retail investors, with long-term debt having an original maturity of more than 12 months.

We sponsor a number of securitization programs that can be structured to provide both short- and long-term funding through institutional investors in the United States and international capital markets. For additional information on our securitization transactions, refer to the “Securitization Transactions” section of Item 7 of Part II of our 10-K Report.

We obtain short-term unsecured funding from the sale of floating rate demand notes under our Ford Interest Advantage program and by issuing unsecured commercial paper in the United States, Europe, and other international markets. At December 31, 2009, the principal amount outstanding of Ford Interest Advantage notes, which may be redeemed at any time at the option of the holders thereof without restriction, was about $4 billion. At present, all of our short-term credit ratings by NRSROs are below the Tier-2 category, and as a result we have limited access to the unsecured commercial paper market and our unsecured commercial paper cannot be held by money market funds. At December 31, 2009, the principal amount outstanding of our unsecured commercial paper was less than $1 million.

We do not hold reserves specifically to fund the payment of any of our unsecured short-term funding obligations. Instead, we maintain multiple sources of liquidity, including cash, cash equivalents, and marketable securities (excluding marketable securities related to insurance activities), unused committed liquidity programs, excess securitizable assets, and committed and uncommitted credit facilities, which should be sufficient for our unsecured short-term funding obligations.

Government-Sponsored Securitization Funding Programs

Government-sponsored securitization funding programs have helped stabilize the asset-backed securitization market. Since the third quarter of 2009, we significantly reduced the use of these programs as our access to the public and private securitization and unsecured markets continued to improve.

Commercial Paper Funding Facility. The CPFF became operational in October 2008 and purchased unsecured and asset-backed commercial paper from U.S. issuers. In 2008, we registered to sell up to $16 billion from our asset-backed commercial paper program (“FCAR”) to the CPFF. At December 31, 2008, FCAR had $7 billion of commercial paper outstanding under the CPFF, which represented about 60% of FCAR’s outstanding balance. FCAR was able to issue a limited amount of commercial paper to investors during the first half of 2009 and at lower interest rates than under CPFF, but with a relatively short average maturity compared with CPFF and often overnight. FCAR issued a total of $9 billion of commercial paper to the CPFF in 2009, all of which had matured by September 30, 2009. Commercial paper was sold to the CPFF at a price based on the designated benchmark rate plus a spread of 300 basis points. This represented a significantly higher rate than those that prevailed in the asset-backed commercial paper market before August 2007, when the disruptions in the debt and asset-backed securitization markets began. As a result of improvements in the asset-backed commercial paper market as well as a reduction in the overall size of the FCAR program, FCAR is able to issue commercial paper outside the CPFF at prices and average maturities that are close to those that prevailed before August 2007. The CPFF ceased purchasing commercial paper on February 1, 2010.

Term Asset-Backed Securities Loan Facility. TALF began in March 2009 to make credit available by restoring liquidity in the asset-backed securitization market. Under TALF, the Federal Reserve Bank of New York (“FRBNY”) makes loans to holders of TALF-eligible asset-backed securities. The loans are equal to the market value of the asset-backed securities less a discount. Interest rates on most TALF loans are 100 basis points over the respective term benchmark rate, and discounts vary according to the assets supporting the asset-backed securities. The TALF program revived the asset-backed securitization market by attracting new investors who purchased asset-backed securities, receiving higher spreads on these securities than the spreads they pay on their loans from FRBNY. As investor demand increased due to the liquidity provided by TALF, spreads generally narrowed on our issuances and the percentage of non-TALF investors increased. As the spread on certain asset-backed securities fell below the 100 basis point spread on TALF loans, our TALF-eligible asset-backed securities were purchased almost exclusively by non-TALF investors.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

We issued $10.3 billion of TALF-eligible asset-backed securities in 2009, of which $2.2 billion amortized during the year and $8.1 billion was outstanding at December 31, 2009. We have also issued a total of $1.3 billion of TALF-eligible asset-backed securities in 2010. The following table summarizes our TALF-eligible issuances including the weighted average spread of the triple-A rated notes over the relevant benchmark rates for securitization transactions:

										Weighted
										Average
Date				Issuer		Size				Spread
						(in billions)				(basis points)
Retail Installment
Mar. 2009				Ford Credit Auto Owner Trust 2009-A		$	3.0				295
June 2009				Ford Credit Auto Owner Trust 2009-B			1.9				161
July 2009				Ford Credit Auto Owner Trust 2009-C			1.0				165
Sep. 2009				Ford Credit Auto Owner Trust 2009-D			2.1				83
Wholesale
Oct. 2009				Ford Credit Master Owner Trust 2009-2		$	1.5				155
Jan. 2010				Ford Credit Master Owner Trust 2010-1			1.3				165
Retail Lease
June 2009				Ford Credit Auto Lease Trust 2009-A		$	0.8				211

We recently completed two public asset-backed securitization transactions that were not TALF-eligible: a retail securitization transaction with a weighted average spread of 48 basis points on the triple-A rated notes in November 2009 and a lease securitization transaction with a weighted average spread of 54 basis points on the triple-A rated notes in February 2010. In January 2010, we issued about $230 million of non-TALF subordinated wholesale asset-backed securities that were rated double-A and single-A. In February 2010, we also issued $250 million of private wholesale asset-backed securities with a maturity of five years compared with the three-year maturity of our previous TALF transactions. We do not plan to complete any additional TALF-eligible retail or lease transactions before the expected expiration of TALF on March 31, 2010. Given the recent improvements in the securitization market and absent further significant market disruptions, we have confidence we can obtain funding in the public securitization markets without TALF.

European Central Bank Open Market Operations. FCE is eligible to access liquidity through the ECB’s open market operations program. This program allows eligible counterparties to use eligible assets (including asset-backed securities) as collateral for short-term liquidity. The present term limitation is three months; however, in the past the term has been as long as one year. The funding efficiency of liquidity provided under this program is typically lower than if the asset-backed securities were placed in the public or private markets because the ECB applies its own market valuation to the collateral and a discount to the original face value of the asset-backed securities. The market valuation and discount vary by the term of the asset, asset type, and jurisdiction of the asset. During the first half of 2009, FCE used the ECB’s open market operations program to provide additional liquidity at a time when access to the asset-backed securitization market was limited and costs for such funding were significantly higher than in the past. FCE had $1.8 billion and $1.1 billion of funding through the ECB at December 31, 2009 and 2008, respectively. During the second half of 2009, improvements in the asset-backed securitization market allowed FCE to receive funding from public and private securitization transactions and sell collateral previously posted with the ECB in the secondary markets. We expect FCE’s utilization of the ECB open market operations program to decline.

Cost of Funding Sources

The cost of securitization transactions and unsecured debt funding is based on a margin or spread over a benchmark interest rate. Spreads are typically measured in basis points. Our asset-backed funding and unsecured long-term debt costs are based on spreads over U.S. Treasury securities of similar maturities, a comparable London Interbank Offered Rate (“LIBOR”), or other comparable benchmark rates. Our floating rate demand notes funding costs are changed depending on market conditions.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

In addition to enhancing our liquidity, one of the main reasons that we have increased our use of securitization transactions as a funding source over the last few years has been that spreads on our securitization transactions have been more stable and lower than those on our unsecured long-term debt funding. Prior to August 2007, our securitized funding spreads (which are based on the creditworthiness of the underlying securitized asset and enhancements) were not volatile, while our unsecured long-term spreads were volatile. Consistent with the overall market, we were impacted by volatility in the asset-backed securitization market beginning in the second half of 2007. We experienced higher spreads for several of our committed liquidity programs as well as our public and private issuances. During 2009, our spreads on the three-year fixed rate notes offered in our U.S. public retail securitization transactions decreased from 425 to 70 basis points over the relevant benchmark rates from March 2009 to November 2009, respectively. During 2009, our U.S. unsecured long-term debt transaction spreads decreased from 1,006 to 480 basis points over the relevant benchmark rates from June 2009 to December 2009, respectively.

Funding Portfolio

Our outstanding debt and off-balance sheet securitization transactions were as follows on the dates indicated:

		December 31,
		2009				2008				2007
		(in billions)
Debt
Asset-backed commercial paper (a)(b)		$	6.4			$	11.5			$	13.5
Other asset-backed short-term debt (a)			4.5				5.6				5.2
Ford Interest Advantage (c)			3.6				2.0				5.4
Unsecured commercial paper			0.0				0.0				0.5
Other short-term debt			0.9				1.0				1.5
Total short-term debt			15.4				20.1				26.1
Unsecured long-term debt (including notes payable within one year)			38.9				51.2				62.8
Asset-backed long-term debt (including notes payable within one year) (a)			42.0				55.2				50.5
Total debt			96.3				126.5				139.4
Off-Balance Sheet Securitization Transactions
Securitized off-balance sheet portfolio			0.1				0.6				6.0
Retained interest			0.0				(0.1	)			(0.7	)
Total off-balance sheet securitization transactions			0.1				0.5				5.3
Total debt plus off-balance sheet securitization transactions		$	96.4			$	127.0			$	144.7
Ratios
Securitized funding to managed receivables			56	%			62	%			51	%
Short-term debt and notes payable within one year to total debt			43				50				43
Short-term debt and notes payable within one year to total capitalization			39				46				39

At December 31, 2009, unsecured long-term debt (including notes payable within one year) was down about $12 billion from year-end 2008, primarily reflecting about $18 billion of debt maturities and repurchases, offset partially by about $6 billion of new unsecured public and private long-term debt issuance. Unsecured long-term debt maturities were as follows: 2010 — $7 billion; 2011 — $11 billion; 2012 — $7 billion; and the remainder thereafter.

At December 31, 2009, asset-backed long-term debt (including notes payable within one year) was down about $13 billion from year-end 2008, reflecting amortization of asset-backed debt in excess of asset-backed long-term debt issuance.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Term Funding Plan

The following table shows our public and private term funding issuances in 2008 and 2009 and our planned issuances for 2010:

		2010
		Forecast				2009				2008
		(in billions)
Public Term Funding
Unsecured		$	3-  6			$	5			$	2
Securitization Transactions.			8-12				15				11
Total public term funding		$	12-17			$	20			$	13
Private Term Funding*		$	8-13			$	11			$	29

In 2009, we completed about $20 billion of public term funding transactions, including: about $12 billion of retail asset-backed securitization transactions in the United States, Canada, and Europe; about $2 billion of wholesale asset-backed securitization transactions in the United States; about $1 billion of lease asset-backed securitization transactions in the United States; and about $5 billion of unsecured issuances.

In 2009, we completed about $11 billion of private term funding transactions (excluding our on-balance sheet asset-backed commercial paper program) in several markets, including about $4 billion in Canada. These private transactions included retail, lease, and wholesale asset-backed securitization transactions.

In 2009, total issuance was about $11 billion lower than 2008, primarily reflecting lower funding requirements resulting from lower receivables. However, 2009 public issuance was about $7 billion higher than 2008, primarily reflecting the availability of and our preference to issue in the public markets. In 2009, there was a corresponding reduction in reliance on private capacity as we lowered our utilization of committed funding programs.

Through February 24, 2010, we completed about $4 billion of public term funding transactions, including about $1.5 billion for a lease asset-backed securitization transaction in the United States, about $1.5 billion of wholesale asset-backed securitization transactions in the United States, about $800 million of retail asset-backed securitization transactions in the United States, Canada, and Europe, and about $500 million of unsecured issuances in the United States. We also completed about $1 billion of private term funding transactions, primarily reflecting retail and wholesale asset-backed securitization transactions in the United States and Europe.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Liquidity

We define liquidity as cash, cash equivalents, and marketable securities (excluding marketable securities related to insurance activities) and capacity (which includes capacity in our committed liquidity programs, FCAR program, and credit facilities), less asset-backed capacity in excess of eligible receivables and cash and cash equivalents required to support on-balance sheet securitization transactions. We have multiple sources of liquidity, including committed asset-backed funding capacity.

		December 31,
		2009				2008				2007
		(in billions)
Cash, cash equivalents, and marketable securities*		$	17.3			$	23.6			$	16.7
Committed liquidity programs		$	23.2			$	28.0			$	36.8
Asset-backed commercial paper (“FCAR”)			9.3				15.7				16.9
Credit facilities			1.3				2.0				3.0
Committed capacity		$	33.8			$	45.7			$	56.7
Committed capacity and cash		$	51.1			$	69.3			$	73.4
Less: Capacity in excess of eligible receivables			(6.5	)			(4.8	)			(4.7	)
Less: Cash and cash equivalents to support on-balance sheet securitization transactions			(5.2	)			(5.5	)			(4.7	)
Liquidity		$	39.4			$	59.0			$	64.0
Less: Utilization			(18.3	)			(37.6	)			(36.1	)
Liquidity available for use		$	21.1			$	21.4			$	27.9

At December 31, 2009, committed capacity and cash shown above totaled $51.1 billion, of which $39.4 billion could be utilized (after adjusting for capacity in excess of eligible receivables of $6.5 billion and cash required to support on-balance sheet securitization transactions of $5.2 billion). At December 31, 2009, $18.3 billion was utilized, leaving $21.1 billion available for use (including $12.1 billion of cash, cash equivalents, and marketable securities, but excluding marketable securities related to insurance activities and cash and cash equivalents to support on-balance sheet securitization transactions).

At December 31, 2009, our liquidity available for use was lower than year-end 2008 by about $300 million, as debt maturities and cash payments were higher than the impact of lower receivables and new debt issuances. The reduction in liquidity available for use from year-end 2008 also included a $630 million cumulative adjustment, reflected in the first quarter of 2009, to correct for the overstatement of cash and cash equivalents and certain accounts payable that originated in prior periods. For additional information on this correction, refer to the consolidated statement of cash flows. Liquidity available for use was 22% of managed receivables.

In addition to the $21.1 billion of liquidity available for use, the $6.5 billion of capacity in excess of eligible receivables provides us with an alternative for funding future purchases or originations and gives us flexibility to shift capacity to alternate markets and asset classes.

Cash, Cash Equivalents, and Marketable Securities. At December 31, 2009, our cash, cash equivalents, and marketable securities (excluding marketable securities related to insurance activities) totaled $17.3 billion, compared with $23.6 billion at year-end 2008. In the normal course of our funding activities, we may generate more proceeds than are required for our immediate funding needs. These excess amounts are maintained primarily as highly liquid investments, which provide liquidity for our short-term funding needs and give us flexibility in the use of our other funding programs. Our cash, cash equivalents, and marketable securities (excluding marketable securities related to insurance activities) primarily include federal agency securities, bank time deposits with investment grade institutions, A-1/P-1 (or higher) rated commercial paper, U.S. Treasury bills, and money market funds that invest primarily in federal agency securities, U.S. Treasury bills, and other short-term investment grade securities. The average maturity of these investments is typically less than 90 days and is adjusted based on market conditions and liquidity needs. We monitor our cash levels and average maturity on a daily basis. Cash and cash equivalents include amounts to be used only to support our on-balance sheet securitization transactions of $5.2 billion at December 31, 2009 and $5.5 billion at December 31, 2008.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Committed Liquidity Programs. We and our subsidiaries, including FCE, have entered into agreements with a number of bank-sponsored asset-backed commercial paper conduits (“conduits”) and other financial institutions whereby such parties are contractually committed, at our option, to purchase from us eligible retail or wholesale assets or to purchase or make advances under asset-backed securities backed by retail, lease, or wholesale assets for proceeds of up to $23.2 billion at December 31, 2009 ($10.8 billion retail, $8.1 billion wholesale, and $4.3 billion supported by various retail, lease, or wholesale assets) of which $7.4 billion are commitments to FCE. These committed liquidity programs have varying maturity dates, with $20.2 billion having maturities within the next twelve months (of which $6.7 billion relates to FCE commitments), and the remaining balance having maturities between March 2011 and December 2011. While there is a risk of non-renewal of some of these committed liquidity programs, which could lead to a reduction in the size of these programs and/or higher costs, our capacity in excess of eligible receivables would enable us to absorb some reductions. Our ability to obtain funding under these programs is subject to having a sufficient amount of assets eligible for these programs as well as our ability to obtain interest rate hedging arrangements for certain securitization transactions. For additional information on our committed liquidity programs, see Note 10 of our Notes to the Financial Statements.

Credit Facilities

Our credit facilities and asset-backed commercial paper lines were as follows on the dates indicated:

		December 31,
		2009				2008				2007
		(in billions)
Credit Facilities
Ford Credit bank lines		$	0.0			$	0.3			$	0.5
FCE bank lines			1.3				1.7				2.5
Utilized amounts			(0.7	)			(0.6	)			(0.9	)
Available credit facilities		$	0.6			$	1.4			$	2.1
Asset-Backed Commercial Paper Lines
FCAR asset-backed commercial paper lines		$	9.3			$	15.7			$	16.9
Motown NotesSM asset-backed commercial paper lines			—				—				0.3
Total asset-backed commercial paper lines		$	9.3			$	15.7			$	17.2

At December 31, 2009, we and our subsidiaries, including FCE, had $1.3 billion of contractually-committed unsecured credit facilities with financial institutions, of which $645 million were available for use. In addition, at December 31, 2009, we had reduced the FCAR program size to $9.3 billion of contractually-committed liquidity facilities provided by banks to match our funding needs and reflect commercial paper market conditions. For additional information on our credit facilities, see Note 10 of our Notes to the Financial Statements.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Balance Sheet Liquidity Profile

We define our balance sheet liquidity profile as the cumulative maturities of our finance receivables, investment in operating leases, and cash less the cumulative debt maturities over upcoming annual periods. The following table shows our balance sheet liquidity profile for the periods presented as of December 31, 2009:

		Cumulative Maturities
														Through
		Through				Through				Through				2013 and
		2010				2011				2012				Beyond
		(in billions)
Finance receivables (a), investment in operating leases (b) and cash (c)		$	73.1			$	95.0			$	105.5			$	113.3
Debt			(49.9	)			(70.5	)			(81.7	)			(96.6	)
Finance receivables, investment in operating leases and cash over/(under) debt		$	23.2			$	24.5			$	23.8			$	16.7

Our balance sheet is inherently liquid because of the short-term nature of our finance receivables, investment in operating leases, and cash. Maturities of investment in operating leases consist primarily of rental payments attributable to depreciation over the remaining life of the lease and the expected residual value at lease termination. For additional information on maturities of finance receivables and debt, see Notes 4 and 10 of our Notes to the Financial Statements. The 2010 finance receivables maturities in the table above include all of the wholesale receivables maturities that are otherwise shown in Note 4 as extending beyond 2010. The table above also reflects the following adjustments to debt maturities in Note 10 to match all of the asset-backed debt maturities with the underlying asset maturities:

	•		The 2010 maturities include all of the wholesale securitization transactions that otherwise extend beyond 2010; and
	•		Retail securitization transactions under certain committed liquidity programs are treated as amortizing on January 1, 2010 instead of amortizing after the contractual maturity of those committed liquidity programs that otherwise extend beyond January 1, 2010.

Liquidity Risks

Despite our diverse sources of liquidity, our ability to maintain this liquidity may be affected by the following factors:

	•		Prolonged disruption of the debt and securitization markets;
	•		Global capital market volatility;
	•		Market capacity for Ford- and Ford Credit-sponsored investments;
	•		General demand for the type of securities we offer;
	•		Our ability to continue funding through asset-backed financing structures;
	•		Performance of the underlying assets within our asset-backed financing structures;
	•		Inability to obtain hedging instruments;
	•		Accounting and regulatory changes;
	•		Our ability to maintain credit facilities and renew committed liquidity programs; and
	•		Credit ratings assigned to us.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Securitization Transactions

Overview

We securitize finance receivables and net investment in operating leases through a variety of programs, utilizing amortizing, variable funding, and revolving structures. We also sell finance receivables in structured financing transactions. Due to the similarities between securitization and structured financing, we refer to structured financings as securitization transactions. Our securitization programs are targeted to many different investors in both public and private transactions in capital markets worldwide. We completed our first securitization transaction in 1988, and regularly securitize assets, purchased or originated, in the United States, Canada, Mexico, and Europe.

Most of our securitization transactions do not satisfy the requirements for accounting sale treatment, and the securitized assets and related debt remain on our balance sheet. Some of our securitization transactions, however, do satisfy accounting sale treatment and are not reflected on our balance sheet in the same way as debt funding. All of our securitization transactions since the first quarter of 2007 have been on-balance sheet transactions. Both on- and off-balance sheet securitization transactions have an effect on our financial condition, operating results, and liquidity.

We securitize our assets because the securitization market provides us with a lower cost source of funding compared with unsecured debt given our present credit ratings, and it diversifies our funding among different markets and investors. In the United States, we are generally able to obtain funding in two days for our unutilized capacity in most of our committed liquidity programs. New programs and new transaction structures typically require substantial development time before coming to market.

Use of Special Purpose Entities

In a securitization transaction, the securitized assets are generally held by a bankruptcy-remote special purpose entity (“SPE”) in order to isolate the securitized assets from the claims of our other creditors and ensure that the cash flows on the securitized assets are available for the benefit of securitization investors. As a result, payments to securitization investors are based on the creditworthiness of the securitized assets and any enhancements, and not on our creditworthiness. Senior asset-backed securities issued by the SPEs generally receive the highest short-term credit ratings and among the highest long-term credit ratings from the rating agencies that rate them.

Securitization SPEs have limited purposes and generally are only permitted to purchase the securitized assets, issue asset-backed securities, and make payments on the securities. Some SPEs, such as certain trusts that issue securities backed by retail installment sale contracts, only issue a single series of securities and generally are dissolved when those securities have been paid in full. Other SPEs, such as the trusts that issue securities backed by wholesale receivables, issue multiple series of securities from time to time and are not dissolved until the last series of securities is paid in full.

Our use of SPEs in our securitization transactions is consistent with conventional practices in the securitization industry. We sponsor the SPEs used in all of our securitization programs with the exception of bank-sponsored conduits. None of our officers, directors, or employees holds any equity interests in our SPEs or receives any direct or indirect compensation from the SPEs. These SPEs do not own our Shares or shares of any of our affiliates.

Selection of Assets, Enhancements, and Retained Interests

In order to be eligible for inclusion in a securitization transaction, each asset must satisfy certain eligibility criteria designed for the specific transaction. For example, for securitization transactions of retail installment sale contracts, the selection criteria may be based on factors such as location of the obligor, contract term, payment schedule, interest rate, financing program, the type of financed vehicle, and whether the contracts are active and in good standing (e.g., when the obligor is not more than 30-days delinquent or bankrupt). Generally, we select the assets to be included in a particular securitization randomly from our entire portfolio of assets that satisfy the applicable eligibility criteria.

We provide various forms of credit enhancements to reduce the risk of loss for securitization investors. Credit enhancements include over-collateralization (when the principal amount of the securitized assets exceeds the principal amount of related asset-backed securities), segregated cash reserve funds, subordinated securities, and excess spread (when interest collections on the securitized assets exceed the related fees and expenses, including interest payments on the related asset-backed securities). We may also provide payment enhancements that increase the likelihood of the timely payment of interest and the payment of principal at maturity. Payment enhancements include yield supplement arrangements, interest rate swaps and other hedging arrangements, liquidity facilities, and certain cash deposits.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

We retain interests in our securitization transactions, including senior and subordinated securities issued by the SPE, rights to cash held for the benefit of the securitization investors (for example, a reserve fund), and residual interests. Residual interests represent the right to receive collections on the securitized assets in excess of amounts needed to pay securitization investors and to pay other transaction participants and expenses. We retain credit risk in securitization transactions because our retained interests include the most subordinated interests in the securitized assets and are structured to absorb expected credit losses on the securitized assets before any losses would be experienced by investors. Based on past experience, we expect that any losses in the pool of securitized assets would likely be limited to our retained interests.

Our Continuing Obligations

We are engaged as servicer to collect and service the securitized assets. Our servicing duties include collecting payments on the securitized assets and preparing monthly investor reports on the performance of the securitized assets and on amounts of interest and/or principal payments to be made to investors. While servicing securitized assets, we apply the same servicing policies and procedures that we apply to our owned assets and maintain our normal relationship with our financing customers.

We generally have no obligation to repurchase or replace any securitized asset that subsequently becomes delinquent in payment or otherwise is in default. Securitization investors have no recourse to us or our other assets for credit losses on the securitized assets and have no right to require us to repurchase their investments. We do not guarantee any asset-backed securities and have no obligation to provide liquidity or make monetary contributions or contributions of additional assets to our SPEs either due to the performance of the securitized assets or the credit rating of our short-term or long-term debt. However, as the seller and servicer of the securitized assets, we are obligated to provide certain kinds of support to our securitization transactions, which are customary in the securitization industry. These obligations include indemnifications, repurchase obligations on assets that do not meet eligibility criteria or that have been materially modified, the mandatory sale of additional assets in revolving transactions, and, in some cases, servicer advances of certain amounts.

Risks to Continued Funding under Securitization Programs

The following securitization programs contain structural features that could prevent us from using these sources of funding in certain circumstances:

	•		Retail Securitization — If the credit enhancement on any asset-backed security held by FCAR is reduced to zero, FCAR may not purchase any additional asset-backed securities or issue additional commercial paper and would wind down its operations. In addition, if credit losses or delinquencies in our portfolio of retail assets exceed specified levels, FCAR is not permitted to purchase additional asset-backed securities for so long as such levels are exceeded.
	•		Retail Conduits — If credit losses or delinquencies on the pool of assets held by a conduit exceed specified levels, or if the level of over-collateralization or credit enhancements for such pool decreases below a specified level, we will not have the right to sell additional pools of assets to that conduit.
	•		Wholesale Securitization — If the payment rates on wholesale receivables in the securitization trust are lower than specified levels or if there are significant dealer defaults, we will be unable to obtain additional funding and any existing funding would begin to amortize.
	•		Retail Warehouse — If credit losses or delinquencies in our portfolio of retail assets exceed specified levels, we will be unable to obtain additional funding from the securitization of retail installment sale contracts through our retail warehouse facility (i.e., a short-term credit facility under which draws are backed by the retail contracts).
	•		Lease Warehouse — If credit losses or delinquencies in our portfolio of retail lease contracts exceed specified levels, we will be unable to obtain additional funding from the securitization of retail lease contracts through our lease warehouse facility (i.e., a credit facility under which draws are backed by the retail lease contracts).

In the past, these features have not limited our ability to use securitization to fund our operations.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

In addition to the structural features discussed previously, our securitization programs may be affected by the following factors:

	•		Market — Market disruption and volatility could impact investors’ acceptance of asset-backed securities and our ability to access debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts. For additional information on market risk, refer to the “Market Risk” section of Item 7A of Part II of our 10-K Report.
	•		Market capacity for us and our sponsored investments — Investors may reach exposure limits and/or wish to diversify away from our risk.
	•		General demand for the type of assets supporting the asset-backed securities — Investor desire for securities with different risk and/or yield characteristics could result in reduced demand for these types of investments.
	•		Availability of committed liquidity facilities — Our ability to maintain committed liquidity facilities for any programs that require them.
	•		Amount and credit quality of assets available — Lower overall asset levels or a higher proportion of non-performing assets could decrease the amount of assets available to securitize.
	•		Performance of assets in our previous securitization transactions — If assets in our existing securitization transactions deteriorate significantly, we may not be able to access the market, particularly in public transactions where asset performance is publicly available and/or the costs to securitize may increase.
	•		Accounting and regulatory changes — Such changes may result in temporary disruption or termination of one or more of our present programs which may or may not be able to be restructured or replaced.
	•		Credit ratings — Credit ratings assigned to us may impact investors’ acceptance of our asset-backed securities.
	•		Bankruptcy of Ford, Ford Credit, or FCE — A bankruptcy of Ford, Ford Credit, or FCE would cause certain of our funding transactions to amortize and result in a termination of certain liquidity commitments.

If, as a result of any of these or other factors, the cost of securitization funding were to increase significantly or funding through securitization transactions were no longer available to us, it would have a material adverse impact on our financial condition and results of operations, which could adversely affect our ability to support the sale of Ford’s vehicles.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

On-Balance Sheet Arrangements

Most of our securitization transactions do not satisfy the requirements for accounting sale treatment and, therefore, the securitized assets and related debt are included in our financial statements. We expect our future securitization transactions to be on-balance sheet. We believe on-balance sheet arrangements are more transparent to our investors. Securitized assets are only available to repay the related asset-backed debt and to pay other securitization investors and other participants. These underlying securitized assets are available only for payment of the debt and other obligations issued or arising in the securitization transactions; they are not available to pay our other obligations or the claims of our other creditors. We hold the right to the excess cash flows not needed to pay the debt and other obligations issued or arising in each of these securitization transactions. This debt is not our legal obligation or the legal obligation of our other subsidiaries.

The following table shows worldwide cash and cash equivalents, receivables, and related debt by segment and product for our on-balance sheet securitization transactions:

		December 31,
		2009												2008
						Finance												Finance
						Receivables												Receivables
						and Net												and Net
		Cash and				Investment								Cash and				Investment
		Cash				in Operating				Related				Cash				in Operating				Related
		Equivalents				Leases				Debt				Equivalents				Leases				Debt
		(in billions)
Finance Receivables
North America Segment
Retail installment		$	2.0			$	35.0			$	28.3			$	2.2			$	42.6			$	35.2
Wholesale			0.1				12.6				6.3				0.3				13.3				11.1
Total North America Segment			2.1				47.6				34.6				2.5				55.9				46.3
International Segment
Retail installment			1.4				9.9				7.4				1.1				9.0				7.4
Wholesale			0.4				6.9				4.3				0.9				8.8				6.5
Total International Segment			1.8				16.8				11.7				2.0				17.8				13.9
Total finance receivables			3.9				64.4				46.3				4.5				73.7				60.2
Net investment in operating leases			1.3				10.4				6.6				1.0				15.6				12.0
Total on-balance sheet arrangements		$	5.2			$	74.8			$	52.9			$	5.5			$	89.3			$	72.2

For additional information on our on-balance sheet arrangements, see Note 7 of our Notes to the Financial Statements.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements (off-balance sheet securitization transactions and whole-loan sale transactions, excluding sales of businesses and liquidating portfolios) since the first quarter of 2007, which is consistent with our plan to execute on-balance sheet securitization transactions. For additional information on our off-balance sheet arrangements, see Notes 7 and 9 of our Notes to the Financial Statements.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Leverage

We use leverage, or the debt-to-equity ratio, to make various business decisions, including evaluating and establishing pricing for retail, wholesale, and lease financing, and assessing our capital structure. We refer to our shareholder’s interest as equity. We calculate leverage on a financial statement basis and on a managed basis using the following formulas:

The following table shows the calculation of our financial statement leverage (in billions, except for ratios):

		December 31,
		2009				2008				2007
Total debt		$	96.3			$	126.5			$	139.4
Equity			11.0				10.6				13.4
Financial statement leverage (to 1)			8.8				12.0				10.4

The following table shows the calculation of our managed leverage (in billions, except for ratios):

		December 31,
		2009				2008				2007
Total debt		$	96.3			$	126.5			$	139.4
Securitized off-balance sheet receivables outstanding			0.1				0.6				6.0
Retained interest in securitized off-balance sheet receivables			0.0				(0.1	)			(0.7	)
Adjustments for cash, cash equivalents, and marketable securities (a)			(17.3	)			(23.6	)			(16.7	)
Adjustments for derivative accounting (b)			(0.2	)			(0.4	)			0.0
Total adjusted debt		$	78.9			$	103.0			$	128.0
Equity		$	11.0			$	10.6			$	13.4
Adjustments for derivative accounting (b)			(0.2	)			(0.2	)			(0.3	)
Total adjusted equity		$	10.8			$	10.4			$	13.1
Managed leverage (to 1)			7.3				9.9				9.8

We believe that managed leverage is useful to our investors because it reflects the way we manage our business. We retain interests in receivables sold in off-balance sheet securitization transactions and, with respect to subordinated retained interests, are exposed to credit risk. Accordingly, we evaluate charge-offs, receivables, and leverage on a managed as well as a financial statement basis. We also deduct cash and cash equivalents, and marketable securities (excluding marketable securities related to insurance activities) because they generally correspond to excess debt beyond the amount required to support our operations and amounts to support on-balance sheet securitization transactions. We make derivative accounting adjustments to our assets, debt, and equity positions to reflect the impact of interest rate instruments we use in connection with our term-debt issuances and securitization transactions. The derivative accounting adjustments related to these instruments vary over the term of the underlying debt and securitized funding obligations based on changes in market interest rates. We generally repay our debt obligations as they mature. As a result, we exclude the impact of these derivative accounting adjustments on both the numerator and denominator in order to exclude the interim effects of changes in market interest rates. For additional information on our use of interest rate instruments and other derivatives, refer to Item 7A of Part II of our 10-K Report. We believe the managed leverage measure provides our investors with meaningful information regarding management’s decision-making processes.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

We plan our managed leverage by considering prevailing market conditions and the risk characteristics of our business. At December 31, 2009, our managed leverage was 7.3 to 1, compared with 9.9 to 1 a year ago. Our managed leverage is significantly below the threshold of 11.5 to 1 set forth in the Amended and Restated Support Agreement with Ford. In 2009, we distributed $1.5 billion to our parent, which included in the first quarter of 2009 a non-cash distribution of about $1.1 billion and in the third quarter of 2009 a cash distribution of $400 million and a non-cash distribution of $31 million for our ownership interest in AB Volvofinans. For additional information on our planned distributions, see the “Outlook” section of Item 7 of Part II of our 10-K Report.

Aggregate Contractual Obligations

We are party to certain contractual obligations involving commitments to make payments to others. Most of these are debt obligations, which are recorded on our balance sheet and disclosed in our Notes to the Financial Statements. Long-term debt may have fixed or variable interest rates. For long-term debt with variable rate interest, we estimate the future interest payments based on projected market interest rates for various floating rate benchmarks received from third parties. In addition, we enter into contracts with suppliers for purchases of certain services, including operating lease commitments. These arrangements may contain minimum levels of service requirements. Our aggregate contractual obligations as of December 31, 2009 are shown below:

		Payments Due by Period
																		2015 and
		Total				2010				2011-2012				2013-2014				Thereafter
		(in millions)
Long-term debt obligations*		$	81,205			$	26,005			$	40,082			$	9,933			$	5,185
Interest payments relating to long-term debt			12,053				3,500				4,319				1,745				2,489
Operating lease obligations			87				29				34				17				7
Purchase obligations			5				5				—				—				—
Total		$	93,350			$	29,539			$	44,435			$	11,695			$	7,681