Greenberg: More Cash Equals More Risk for Yield-Hungry Companies
Beyond the earnings headlines, you might want to keep an eye on corporate balance sheets, especially as their cash balloons.
With so much cash, companies have two choices beyond acquisitions, dividends and buybacks:
- They can invest it the old-fashioned way by putting it into Treasurys and money markets and getting a yield that might as well be zero.
- They can start reaching for yield by taking more risk.
It would appear they're doing more of the latter than the former.
“If you’re a cash manager you have to demonstrate you’re adding value,” says Peter Atwater, president of Financial Insyghts, a consulting firm focused on financial services issues and a regular commentator at Minyanville.com.
“Corporate treasurers are saying that if [money market fund and treasurys and other traditional forms of cash and cash-equivalents) can’t get generate good enough returns, they’ll do it themselves. They’ll take the maturity and make the decisions.”
Consider, for example, Google. In its earnings release last week, the company disclosed for the first time that it got cash from securities lending.
It's not alone in doing this, and it’s actually more common than you might think. Google says it has been doing it for three years.
So why disclose it now?
In response to my question, Google said, “We lend out our investments (primarily Treasurys, agencies and US/sovereign-backed securities) and in return we receive collateral in the form of: Cash which we invest and earn interest or securities which we charge a fee, and therefore enhance the overall yield on our investments."
Google's statement continued, “We used to unwind it at quarter end, but starting in Q210 we continued the program without unwinding to enhance our yield. Accounting treatment requires cash collateral received in securities lending to be recorded as an asset, and the obligation to return the cash to be recorded as a liability with an accompanying footnote/disclosure.”
Key in that statement, in my opinion, was the decision to stop unwinding the securities lending trade at quarter’s end to enhance yield. According to Atwater, “People are so sensitive to what they’re showing at quarter’s end, with the yield premium [on securities lending] getting attractive, they’re willing to make the disclosure because they’re getting paid.”
Higher yield is good, but isn't that what those supposedly safe auction-rate securities were supposed give? And they burned quite a few companies, including Google.
Here's where this gets potentially interesting: There are a bunch of things on balance sheets you used to never see.
But dig down into the footnotes of the quarterly filings and you'll see such things as:
Corporate debt—not terribly exotic, but higher risk, nonetheless.
Mortgage-backed securities—slightly more exotic and higher risk.
Foreign government debt—much more exotic and, especially right now, considerably higher risk.
And that's only what companies disclose. On the foreign side, for example, there is generally no geographic breakdown, which might be a tad disconcerting as we see global debt getting downgraded.
My take: I don't want to sound like a Cassandra, but higher reward, even if it's just a few basis points, equals higher risk. And we haven’t even brought up the possibility of a liquidity crunch if foreign governments decide to get protectionist on us about capital flows.
This much we do know: If you're a corporate cash manager right now, zero is not an acceptable return. Therein lies the conundrum.
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