Cash & Liquidity Management

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The New Look of Liquidity Management in the U.S. Chastened by Risk, Shaped by Globalization, Enabled by Technology For the first time in a decade, corporate liquidity in the U.S. has fallen, by $250 billion. This decline follows six months of intense market turbulence. The general creditworthiness of many commercial banks and brokerages has been questioned as a result of these unsettling events. Corporate Treasurers have begun to scrutinize the underlying instruments of their investments andundertake a flight to quality. Firms are revisiting their investment policies in an effort to ‘bulletproof’ their Treasury operations and safeguard every dollar.

The New Look of Liquidity Management in the U.S.

Chastened by Risk, Shaped by Globalization, Enabled by Technology

by Dave Robertson, Partner, Financial Institutions Practice, Treasury Strategies, Inc.

For the first time in a decade, corporate liquidity in the U.S. has fallen, by $250 billion. This decline follows six months of intense market turbulence, which began with a crisis in sub-prime mortgages that fueled a credit crisis, and later expanded into the deterioration of money market securities, including enhanced cash funds and auction-rate securities. The general creditworthiness of many commercial banks and brokerages has been questioned as a result of these unsettling events. Corporate Treasurers have begun to scrutinize the underlying instruments of their investments and undertake a flight to quality. Firms are revisiting their investment policies in an effort to ‘bulletproof’ their Treasury operations and safeguard every dollar.

What happened

Job number one for the corporate Treasurer is to serve as custodian of the company’s cash. It’s no secret that in recent years, many Treasurers lost sight of that objective and began creating aggressive portfolios to earn better returns on their cash. Unfortunately, it took some fairly visible setbacks to stem such practices.

As mentioned above, corporate liquidity fell for the first time since 1999 as a result of six months of intense turbulence stretching from July 1 2007 to January 1 2008. The $250 billion decline represents 5% of the total market, which stands at $5.25 trillion as of July 1 2008.

While corporate investors did incur some short-term investment losses, the drop in liquidity was largely driven by the need to use excess cash to fund operations. Additionally, the mix of liquidity by investment type notably changed. Corporate investors made dramatic moves to protect their cash. There was a strong flight from commercial paper, auction-rate securities and repurchase agreements and a rush to bank deposits and sweep accounts as well as conservative money market funds.

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