FCJ Ford Motor Credit Company Llc

 

 

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

For the fiscal year ended December 31, 2007

OR

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

For the transition period from                      to                     

Commission file number 1-6368

Ford Motor Credit Company LLC

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (313) 322-3000

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 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		Smaller reporting company o
				(Do not check if a smaller reporting company)

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 interest 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 54

TABLE OF CONTENTS

						Page
		Item
PART I		1		Business			1
				Overview			1
				Retail Financing			3
				Wholesale Financing			5
				Other Financing			5
				Marketing and Special Programs			5
				Servicing			6
				Insurance			7
				Employee Relations			7
				Governmental Regulations			7
				Transactions with Ford and Affiliates			8
		1A		Risk Factors			9
		1B		Unresolved Staff Comments			11
		2		Properties			11
		3		Legal Proceedings			12
		4		Submission of Matters to a Vote of Security Holders			12
PART II		5		Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities			12
		6		Selected Financial Data			12
		7		Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
				Overview			13
				Trends and Strategy			14
				Results of Operations			15
				Financial Condition			18
				Credit Risk			19
				Credit Ratings			24
				Funding			25
				Liquidity			28
				Securitizations			31
				On-Balance Sheet Arrangements			34
				Off-Balance Sheet Arrangements			34
				Leverage			37
				Aggregate Contractual Obligations			38
				Critical Accounting Estimates			39
				Accounting Standards Issued But Not Yet Adopted			42
				Outlook			43
				Cautionary Statement Regarding Forward Looking Statements			43
		7A		Quantitative and Qualitative Disclosures About Market Risk			46
				Overview			46
				Market Risk			46
				Currency Exchange Rate Risk			47
				Interest Rate Risk			47
				Counterparty Risk			50
				Operating Risk			51
		8		Financial Statements and Supplementary Data			51
		9		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			51
		9A		Controls and Procedures			52
		9B		Other Information			52
PART III		10		Directors, Executive Officers and Corporate Governance			53
		11		Executive Compensation			53
		12		Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters			53
		13		Certain Relationships and Related Transactions, and Director Independence			53
		14		Principal Accounting Fees and Services			53
PART IV		15		Exhibits and Financial Statement Schedules			54
				Signatures			57
				Report of Independent Registered Public Accounting Firm		FC-1
				Consolidated Statement of Income		FC-2
				Consolidated Balance Sheet		FC-3
				Consolidated Statement of Shareholder’s Interest/Equity		FC-4
				Consolidated Statement of Cash Flows		FC-5
				Notes to the Financial Statements		FC-6
Calculation of Ratio of Earnings to Fixed Charges
Consent of Independent Registered Public Accounting Firm
Certificate of Secretary
Rule 15d-14(a) Certification of CEO
Rule 15d-14(a) Certification of CFO
Section 1350 Certification of CEO
Section 1350 Certification of CFO

PART I

Item 1. Business (Continued)

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 Jaguar, Land Rover, Mazda and Volvo brand names to and through Jaguar, Land Rover, Mazda, and Volvo dealers, respectively.

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 22% and 20% of our total managed receivables at year-end 2007 and 2006, respectively. Within the International Segment our Europe region accounted for 79% and 76% of our managed receivables at year-end 2007 and 2006, 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 operates branches in 15 other European countries. In addition, FCE has operating subsidiaries in the United Kingdom, Finland, Hungary, Poland and the Czech Republic that provide a variety of wholesale, leasing and retail vehicle financing. In our largest European markets, Germany and the United Kingdom, FCE offers most of our products and services under the Ford Credit/Bank, Volvo Car Finance, Land Rover Financial Services, Jaguar Financial Services and Mazda Credit/Bank brands. 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. 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 outsourcing arrangements exist in several Central and Eastern European markets. In the Asia-Pacific region, we operate in Australia, Japan, Taiwan, Thailand and China. In the Latin America region, we operate in Mexico, Puerto Rico, Brazil, Chile 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, 2007 (“Ford’s 2007 10-K Report”), filed separately with the SEC and included as an exhibit to this 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. As our funding costs have increased, our reliance on Ford-sponsored special-rate financing programs offered exclusively through us has grown in importance. For further discussion regarding interest supplements and other support costs earned from affiliated companies, see Note 15 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:

Item 1. Business (Continued)

We compete mainly on the basis of service and financing rates. 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. In addition to Ford-sponsored special-rate financing programs, 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. Higher funding costs and industry competition have weakened our competitive position. The ability to tailor our financing services to support Ford’s marketing plans gives us a competitive advantage in providing financing to Ford dealers and their customers. In addition, our size allows us to take advantage of economies of scale in both purchasing and servicing our receivables and leases.

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. However, throughout the automotive financing industry, credit losses before recoveries are typically higher in the first and fourth quarters of the year.

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 dealers of Ford vehicles. 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 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 60 months in the United States in 2007, compared with 61 months in 2006.

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 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 other Ford and non-Ford dealers through auctions. Customers who choose our retail balloon product may also qualify for special-rate financing offers from Ford.

Item 1. Business (Continued)

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.

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 dealers of other Ford brands (Jaguar, Land Rover, Mazda, and Volvo). 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 other 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 2007, the average original lease term was 35 months compared with 32 months in 2006.

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 in 2007, the average wholesale receivable was outstanding for 96 days, excluding the time the vehicle was in transit from the assembly plant to the dealership. 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 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 secured 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 secured 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 and recovering deficiencies for selected accounts.

Payment Extensions . We occasionally offer payment extensions to customers who have encountered temporary financial difficulty that limits their ability to pay as contracted. Over time, about 1-2% of our contracts outstanding are extended, most of them for one month. 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. 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. Repossessed vehicles are sold at open auctions.

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 determines the frequency of physical audits of vehicle inventory.  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 managed within the head office of the local market area and similar risk management principles are applied.

Insurance

We conduct insurance operations primarily through TARIC and its subsidiaries 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:

	•		Extended service plan contracts in the state of Florida and contractual liability insurance on extended service plan contracts in other states, mainly through Ford dealers for new and used vehicles;
	•		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 2007 and 2006.

Employee Relations

Our full-time employees numbered approximately 11,100 and 12,900 at year-end 2007 and 2006, 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 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 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.

Item 1. Business (Continued)

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 branches in 15 other European 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.

Transactions with Ford and Affiliates

We have a profit maintenance agreement with Ford that requires Ford to maintain our consolidated income before income taxes and net income at specified minimum levels. In addition, we have an agreement to maintain a minimum control interest in FCE and to maintain FCE’s net worth above a minimum level. No payments were made under either of these agreements during the 2005 through 2007 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:

Item 1. Business (Continued)

	•		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 15 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 (continued)

Changes in Interest Rates – We are exposed to interest rate risk, and the interest rate to which we are most exposed is U.S. dollar London Interbank Offered Rate (“LIBOR”). Our interest rate risk exposure results principally from “re-pricing risk,’’ or differences in the re-pricing characteristics of assets and liabilities. Any inability to adequately control this exposure could adversely affect our business.

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.

We Have Significant Exposure to Ford –As of December 31, 2007, Ford is obligated to pay us approximately $5.4 billion of interest supplements (including supplements related to sold receivables) and approximately $900   million of residual value support over the terms of the related finance contracts or operating leases in the United States and Canada. 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. We have agreed with Ford that in the event Ford fails to pay its interest supplement or residual value support obligations to us, we may set-off our obligations to Ford against these obligations to us. For a discussion of the change in Ford’s payment practice for interest supplements and residual value support to us, refer to the ‘‘Outlook’’ section of Item 7 of Part II of our 10-K Report.

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

Overview

Generation of Revenue, Income and Cash

Our primary focus is to profitably support the sale of Ford vehicles. 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 securitizations);
	•		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 and securitized off-balance sheet receivables and leases that we continue to service; 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 securitizations 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.

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

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 from 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 further discussion regarding our segments, see Note 16 of our Notes to the Financial Statements.

Trends and Strategy

Origination:  Buy it Right, Price it Right – Our primary focus is to profitably support the sale of Ford vehicles. Our managed receivables have declined due to our focus on financing Ford vehicles and lower Ford retail sales. We will continue to work closely with our brand partners to create value for our dealers and customers by seeking opportunities to go into the marketplace together, leveraging our unique position as Ford’s financing company. Our in-market sales teams provide dealership level account management (finance consulting, insurance and vehicle sales assistance) by jointly reviewing key dealership sales and operating metrics to identify potential profit improvement opportunities. The sales teams focus on growing our business and improving dealership profitability through the use of our wholesale financing, dealer loan, retail financing and after market products.  Risk management remains a key to our continued value and profitability. We have extensive risk experience and large sample sizes, enabling us to develop proprietary scoring models which outperform generic scoring models.  Our focus remains on providing new tools and actionable information to dealers and strengthening global risk skills internally.  Through these efforts, we will continue to generate incremental vehicle sales for Ford.

Servicing:  Operate Efficiently, Collect Effectively, Enhance Owner Loyalty – Our operations will continue to drive efficiencies globally by increasing the commonality of our business processes and information technology platforms.  In North America, we further enhanced our collection modeling capabilities to more effectively manage risk. Our 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. On a global basis, we remain focused on driving cost reductions in proportion to the overall size of our business while improving customer service and owner loyalty. In 2007, we consolidated our U.S. branches into our six existing business centers that manage originations, dealer credit and wholesale operations in addition to the servicing functions. A similar restructuring in Canada will be completed in 2008. A restructuring in Germany was completed in 2007.

Funding: Fund it Efficiently, Manage Risk – Our funding strategy is to maintain a high level of liquidity by having a substantial cash balance and committed funding capacity, allowing us to meet our short-term funding obligations. As a result of lower credit ratings, our unsecured funding costs have increased over time. While we have continued to access the unsecured debt market, we have increased our use of securitization funding as it is presently more cost effective than unsecured funding and allows us access to a broad investor base. We plan to meet a significant portion of our 2008 funding requirements through securitizations and will continue to diversify our asset-backed funding by asset class and region. For an additional discussion of our 2008 funding plan, refer to the “Funding — Term Funding Plan” section of Item 7 of Part II of our 10-K Report. 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 financial institutions in Europe for full service leasing and retail financing). We will continue to pursue and execute such alternative business arrangements.

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

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

Full Year 2006 Compared with Full Year 2005

In 2006, net income was $1,283 million, down $621 million from 2005. On a pre-tax basis, we earned $1,953 million in 2006, down $970 million from 2005.

The decrease in pre-tax earnings primarily reflected:

	•		Higher borrowing costs (about $800 million);
	•		Higher depreciation expense (about $400 million); and
	•		The impact of lower average receivable levels in our managed portfolio (about $400 million).

These were offset partially by:

	•		Market valuations primarily related to non-designated derivatives (about $500 million); and
	•		Reduced operating costs (about $100 million).

In 2006 and 2005, pre-tax earnings included net losses related to market valuation adjustments from derivatives (unallocated risk management in the table below) of $448 million and $912 million, respectively.

Results of our operations by business segment for 2006 and 2005 are shown below:

The decrease in North America Segment earnings primarily reflected higher borrowing costs, higher depreciation expense and the impact of lower average receivable levels in our managed portfolio, offset partially by reduced operating costs.

The decrease in International Segment income primarily reflected higher borrowing costs, the non-recurrence of a gain on sale of compensation bonds in Argentina, lower credit loss reserve reductions and the impact of lower average receivable levels in our managed portfolio. The compensation bonds were issued by the Argentine government in late 2001 and were intended to compensate entities for government-mandated devaluation of the peso undertaken to provide debt relief to consumers.

The improvement in unallocated risk management income reflected the change in market valuations primarily related to non-designated derivatives. In the fourth quarter of 2006, we recorded a $38 million cumulative adjustment to correct the accounting for certain fair value interest rate swaps. For additional information on our unallocated risk management segment, see Note 16 of our Notes to the Financial Statements.

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:

North America Segment

In 2007, our total contract placement volumes were 1.4 million, down 321,000 contracts from a year ago. This decrease primarily reflected lower sales of new Ford, Lincoln and Mercury vehicles, lower used vehicle contract volumes and our lower U.S. Ford, Lincoln and Mercury financing share. This lower financing share is primarily due to changes in the types of Ford’s marketing programs that in 2007 resulted in reduced use of special-rate financing through us.

International Segment

In 2007, our total contract placement volumes were 903,000, down 41,000 contracts from a year ago. The decrease primarily reflected lower volumes in Latin America and Europe.

*		At December 31, 2007 and 2006, includes finance receivables of $67.2 billion and $56.5 billion, respectively, that have been sold for legal purposes in securitizations that do not satisfy the requirements for accounting sale treatment. In addition, at December 31, 2007 and 2006, includes net investment in operating leases of $18.9 billion and $15.2 billion, respectively, that have been included in securitizations that do not satisfy the requirements for accounting sale treatment. These underlying securitized assets are available only for payment of the debt or 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.

Managed receivables decreased from year-end 2006, primarily reflecting lower U.S. retail installment and wholesale receivables, offset partially by changes in currency exchange rates and higher U.S. net investment in operating leases.

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

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 reflected 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, FICO score, employment history, income, amount financed, vehicle value and contract term. As of December 31, 2007, about 4% of the outstanding U.S. retail finance and lease contracts in our serviced portfolio were classified as high risk, down from about 8% in 2000, consistent with our efforts to improve the quality of our portfolio.

*		Reacquired receivables reflect the amount of receivables that resulted from the accounting consolidation of our FCAR Owner Trust retail securitization program (“FCAR”) in the second quarter of 2003.

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 net resale price of repossessed vehicles and other losses associated with impaired accounts and unrecoverable vehicles. 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 and loss-to-receivables ratios for our on-balance sheet and managed portfolios increased from a year ago. These increases, principally in the U.S. retail installment and lease portfolio, primarily reflected higher loss severity as described in the following section.

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 approximately 60% of our worldwide managed portfolio of retail installment receivables and net investment in operating leases at December 31, 2007. Trends and causal factors are consistent with the worldwide results, with repossessions down 8,000 units in 2007 from a year ago, reflecting primarily improved portfolio quality and fewer accounts outstanding. Severity was higher by $1,100 per unit from a year ago, consistent with an increase in amount financed for vehicles repossessed in our portfolio, a higher mix of 72-month contracts and deterioration in used vehicle prices.

*		Less than $50 million.

Our allowance for credit losses totaled $1.1 billion at December 31, 2007, including $88 million for assumption updates pertaining to loss performance trends. The allowance for credit losses is primarily a function of portfolio quality, historical loss performance and receivable levels. Our allowance for credit losses reflects our high quality retail installment and lease portfolio. Certain of our key credit loss metrics (repossession ratio, over-60 day delinquency ratio and new bankruptcy filings) are near historically low levels.

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. In 2007, we increased depreciation expense for vehicles subject to operating leases in our North America portfolio, reflecting higher lease volumes, a decrease in auction values relative to our expectations at the time of contract purchase, and an increase in the percentage of vehicles returned to us at lease termination. For an additional discussion of 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 about 98% of our total investment in operating leases at December 31, 2007:

In 2007, placement volumes were up 41,000 units compared with 2006, consistent with industry trends. Termination and return volumes increased 47,000 units and 63,000 units, respectively, compared with last year, primarily reflecting growth in lease placements since 2004 and higher return rates, consistent with auction values that were lower than expected at the time of contract purchase and a general shift in consumer preferences away from trucks and sport utility vehicles.

In 2007, Ford, Lincoln and Mercury brand U.S. return volumes were up 52,000 units compared with 2006, primarily reflecting growth in lease placement volume since 2004 and higher return rates. Auction values at constant fourth quarter 2007 mix for 24-month lease vehicles were up $570 per unit from 2006 levels, primarily reflecting increased vehicle content on returned vehicles. Auction values for 36-month lease vehicles were down $45 per unit, reflecting weakness in the used vehicle market for trucks and sport utility vehicles. Auction value results in 2007 were lower than our expectations at the time of contract purchase.

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 Rating 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. These lower ratings assigned to us over the past several years are primarily a reflection of those opinions, including concerns regarding Ford’s automotive cash flow and profitability, declining market share and product portfolio strength, excess industry capacity and industry pricing pressure.

The following chart summarizes long-term senior unsecured credit ratings, short-term credit ratings and the outlook assigned to us since January 2005:

*		The SEC recognized Rating and Investment Information, Inc. (“R&I”) and Japan Credit Rating Agency, Ltd. (“JCR”) as NRSROs in May 2007 and September 2007, respectively. Both agencies assign long-term issue ratings to our February 2005 ¥160 billion 1.71% issuance which matures in February 2008. R&I assigns a rating of BB- with a negative outlook and JCR assigns a rating of B+ with a negative outlook.
**		In September 2006, DBRS revised certain rating categories used to rate commercial paper and other short-term debt instruments. This included changing the rating category of R-3 (high), the rating assigned to us as of January 2006, to R-4. The rating revision is related to the redefinition of the rating categories and does not reflect a change in the DBRS opinion regarding the credit quality of these debts.
***		In July 2006, S&P assigned FCE a long-term rating of BB-, a one notch positive differential versus Ford Credit. This differential remains, with FCE’s present long-term rating at B+.

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

Funding

Funding Strategy

Our funding strategy is to maintain a high level of liquidity by having a substantial cash balance and committed funding capacity, allowing us to meet our short-term funding obligations. As a result of lower credit ratings over the past few years, our unsecured funding costs have increased over time. While we continue to access the unsecured debt market when it makes sense to do so, we have increased our use of securitization funding as it is presently more cost effective than unsecured funding and allows us access to a broad investor base. We plan to meet a significant portion of our 2008 funding requirements through securitizations, and to continue to diversify our asset-backed funding by asset class and region. 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 financial institutions in Europe for full service leasing and retail financing). We are continuing to pursue and execute such alternative business arrangements.

Consistent with the overall market, we were impacted by volatility in the asset-backed securities markets during the second half of 2007. Since August 2007, we have experienced higher credit spreads and, in certain circumstances, shorter maturities in our public and private securitization issuances. Given present market conditions, we expect that our credit spreads and the cost of renewing our committed liquidity programs will increase in 2008.

If there were reductions in the market capacity for the types of asset-backed securities used in our asset-backed funding, there could be increased risk to our funding plan. As a result, we may need to reduce the amount of receivables and operating leases we purchase or originate. A significant reduction in our managed receivables would reduce our ongoing profits, and could adversely affect our ability to support the sale of Ford vehicles.

Funding Sources

Our funding sources include primarily securitizations 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 a more complete discussion of securitizations, refer to the “Securitizations” 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, 2007, 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 $5.4 billion. At December 31, 2007, the principal amount outstanding of our unsecured commercial paper was about $500 million. 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.

We do not hold reserves specifically to fund the payment of any of our 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 short-term funding obligations.

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

Cost of Funding Sources

The cost of securitizations 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 LIBOR or other comparable benchmark rates. Our unsecured commercial paper funding costs are based on spreads to LIBOR. Our floating rate demand notes funding costs are changed depending on market conditions.

In addition to enhancing our liquidity, one of the main reasons that we have increased our use of securitizations as a funding source over the last few years has been that spreads on our securitizations 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 securities markets during 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 2007, our spreads on the fixed rate notes offered in our U.S. public retail securitizations ranged between six and eleven basis points during the first half of the year and between 37 and 43 basis points during the second half of the year over the relevant benchmark rates, while our U.S. unsecured long-term debt funding spreads as measured by the five-year credit default swap market have fluctuated between 219 and 750 basis points over LIBOR. In January 2008, we completed a U.S. public retail securitization with spreads on the fixed rate notes between 80 and 110 basis points over the relevant benchmark rates.

*		Obligations issued in securitizations that are payable only out of collections on the underlying securitized assets and related enhancements.

At December 31, 2007, unsecured long-term debt (including notes payable within one year) was down about $9 billion from year-end 2006, primarily reflecting about $18 billion of debt maturities offset partially by about $7 billion of unsecured long term debt issuance and about $2 billion increase in the debt balance due to changes in currency exchange rates. Asset-backed long-term debt (including notes payable within one year) was up about $8 billion from year-end 2006, reflecting asset-backed long-term debt issuance in excess of amortization of asset-backed debt. Securitized off-balance sheet funding was down about $6 billion from year-end 2006, primarily reflecting the amortization of previous securitizations.

In 2007, we completed about $12 billion of public term funding transactions including about $6 billion of unsecured long-term debt, about $5 billion of retail asset-backed securitizations in the U.S., and about $1 billion in a retail asset-backed securitization in Germany. We expect our full year 2008 public term funding requirements to be between $8 billion and $16 billion. In January 2008, we completed a U.S. public retail asset-backed securitization of about $2 billion.

In 2007, we completed about $28 billion of private term funding transactions (excluding our on-balance sheet asset-backed commercial paper programs and proceeds from revolving transactions) in several markets. These private transactions included lease, retail and wholesale asset-backed securitizations and unsecured term debt.

Our funding plan is subject to risks and uncertainties, many of which are beyond our control. If credit markets continue to constrain term securitization funding, we will consider reducing our assets below the low-end of our projected managed receivables balance (i.e., below $130 billion). Refer to the “Outlook” section of Item 7 of Part II of our 10-K Report.

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 asset backed commercial paper program and credit facilities), less asset-backed capacity in excess of eligible receivables and cash required to support on-balance sheet securitizations. We maintain multiple sources of liquidity, including committed asset-backed funding capacity beyond our present needs.

(a)		Excludes marketable securities related to insurance activities.
(b)		As of January 1, 2007.

At December 31, 2007, the capacity of our liquidity sources and cash totaled $73.4 billion, of which $64.0 billion could be utilized (based on the availability of eligible assets and the level of cash required to support on-balance sheet securitizations). As of December 31, 2007, $36.1 billion was utilized, leaving $27.9 billion (including $12.0 billion of cash, cash equivalents and marketable securities, excluding marketable securities related to insurance activities) available for use. These amounts exclude our Motown Notes program, as there is presently a lack of investor demand for extendible commercial paper.

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

Cash, Cash Equivalents and Marketable Securities. At December 31, 2007, our cash, cash equivalents and marketable securities (excluding marketable securities related to insurance activities) totaled $16.7 billion, compared with $21.8 billion at year-end 2006. We ended 2006 with a high level of cash as a result of favorable funding opportunities in the fourth quarter of 2006 which pre-funded some of our 2007 first quarter maturities. In the normal course of our funding activities, we may generate more proceeds than are necessary 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 short-term U.S. Treasury bills, federal agency securities, A-1/P-1 (or higher) rated commercial paper, and bank time deposits with investment grade institutions. 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 balances include amounts to be used only to support our on-balance sheet securitizations of $4.7 billion at December 31, 2007 and $3.7 billion at December 31, 2006.

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 or wholesale assets for proceeds of up to $30.8 billion at December 31, 2007 ($17.1 billion retail and $13.7 billion wholesale) of which $10.0 billion are commitments to FCE. As a result of the continued asset-backed securities market volatility that began in August 2007, there is a risk to the renewal of some of these committed liquidity programs, which could lead to a reduction in the size of these programs and/or higher costs. 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:

At December 31, 2007, we and our subsidiaries, including FCE, had $3.0 billion of contractually committed unsecured credit facilities with financial institutions, of which $2.1 billion were available for use. In addition, at December 31, 2007, banks provided $17.2 billion of contractually committed liquidity facilities to support our two on-balance sheet asset-backed commercial paper programs; $16.9 billion supported our FCAR program and $300 million supported our Motown Notes ^SM wholesale securitization program (“Motown Notes”). For additional information on our credit facilities, see Note 10 of our Notes to the Financial Statements.