Don’t Bank On It

Emerging signs of stabilization in the credit markets, while a welcome sign, should not result in complacency among corporate cash investors. Risk levels are still elevated in several cash investment sectors and the recent government bailout and restructuring of CitiBank demonstrate that surprises in the banking sector are likely not over. And while Citi’s “too big to fail” status helped it garner government support, mid-level specialty banks with sector-focused balance sheets may not be large enough to attract similar support. Therefore, in our view, deposit products from banks should be viewed as what they are – concentrated investments only supported by the banks’ balance sheets and ratings. Such investments often are no comparison, at least from a credit perspective, to diversified separately managed portfolios or money market funds sponsored by government supported parent companies.

Several positive signs of stability emerged as December’s data saw the first uptick in leading indicators in six months and existing home sales increased 6.5% over November levels. Corporate bond issuance also increased 33% from a year ago adding to continuing signs of a thaw in the credit markets Further confidence inducing signs also emerged as money flows began to shift, ever so slightly, from Treasury money market funds back to Government and Prime money market funds. This shift may indicate that the massive flight to quality from September through November, which targeted Treasuries, may be over and investor confidence may be returning to the money fund world.

That shift may also mark continuing difficulty for banks. The relative diversity and general quality of money fund holdings likely attracted $385 billion in new money since September at the expense of bank deposit products, which often attempt to compete for these balances. We are inclined to agree with President Barack Obama, who stated this past weekend that banks remain “in very vulnerable positions.” It seems a lack of diversification and eroding balance sheet quality has been detrimental to bank deposit appeal. For risk averse treasurers, we believe the prudent approach is to pare operational bank exposures to fall within the $250,000 FDIC insurance limit. For cash in excess of $250,000 we feel that appropriate investments include highly rated, diversified money market funds (that still must be carefully researched in their own right) or selected individual credits with professional oversight. Diversification, choice of exposures, separate custody, and professional credit oversight continue to provide the necessary risk control for cash deposits above the $250,000 FDIC coverage provided by banks.

A slew of government programs are now in place that are meant to reduce risk in the short term markets and options continue to emerge for treasury professionals that sought quality and fled to Treasuries in the second half of ’08. While many of these new options are quite attractive, they still must be diligently reviewed and monitored for risks (and rewards). Again, there is no room for complacency among treasurers as the recession rolls on in 2009.

Best Regards,

Ben Campbell
President & CEO