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Changing Opportunities

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February ushered in a sea of potential changes for corporate cash managers. Early in the month, The Wall Street Journal reported on a pending proposal by the SEC to stabilize money market funds through additional regulations. Later in the month, Moody’s Investors Service announced a total of 120 banking credits were being placed on negative watch for potential downgrade. Having anticipated some of the changes for quite some time (link to research), these events, coupled with the pending December 31st expiration of FDIC insurance for deposits above $250,000, are not cause for alarm but a signal to evaluate current strategies and to prepare for potential changes.

We believe that the downward trend in global banking credits is a secular trend and reflects a transition to a more restrictive regulatory environment, which comes at a time when deleveraging is reducing demand for traditional lending services. It’s no surprise that as the banking business model shifts in reaction to new regulations credits will shift, as well. Assuming that the FDIC deposit insurance reverts to its pre-crisis level in 10 months (as scheduled), that money fund reform is well underway and that one-third of the 120 bank credits on Moody’s watch list are in fact downgraded, one should take stock of his or her cash investment program as it stands today versus how it may be structured 10 months from now. Going through this exercise, one should try to envision a cash portfolio with greater selectivity in bank exposure – both on the deposit side and on the investment side, increased corporate exposure, as well as a shift in the mix of money market funds versus individual high-grade credits.

Over the past 20 years at Capital Advisors Group, we have seen corporate cash affected by trends in credits and interest rates. We’ve also seen asset classes go through complete life cycles from birth to death – so change always has been a constant for Treasurers. However, problems tend to arise for those who lag in adapting to change and 2012 will be no different.

In the last several months, we have written extensively on these trends and continuing in this vein, this month’s research takes a look at the secular decline in bank ratings and how this trend may impact Treasurers.

Best Regards,

Ben Campbell
President & CEO

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