Big Business Is Not to Blame

Wall Street serves as an ideal scapegoat for the deepening global recession, but the emerging consensus is that there's plenty of blame to go around. Certainly the banks that turbocharged their balance sheets, borrowing $32 for every $1 they owned, played their part. But families, too, doubled down on bad bets by turning houses into ATMs, and by 2007 averaged $121,000 in outstanding mortgage debt. Governments, particularly Western ones, immiserated future generations by selling trillions of dollars' worth of bonds. No one, it seemed, was immune to the allure of cheap credit.

The big exception to the spending spree? Corporations. Aside from the profligate financial sector, big business behaved quite responsibly over the past five years. They paid down debts, steered away from short-term financing and, most important, hoarded cash to prepare for rainy days. Now, with cloudy skies stretching to the horizon, cash-rich companies are being lauded by investors—an ironic turn of events, given that as recently as early 2007 many of the same investors considered cash to be an albatross. But will an overflowing bank account be enough protection against the worst financial meltdown since the Great Depression?

The cash wealth of the world's large corporations is truly impressive, and stands at record levels. By 2006, the average firm held 23 percent of its assets in cash, up from 10 percent in 1980, according to one academic study. For some firms, the numbers are breathtakingly large. Pharmaceutical giant Johnson & Johnson sits atop a $15 billion treasure chest. Microsoft has enough to buy Yahoo at full price—and in cash—and still have $4 billion left over. And at $38 billion, ExxonMobil's cash on hand is roughly equal to the GDP of Syria. "Companies are going into this recession much stronger than they went into the last recession," says Carsten Stendevad, head of financial strategy at Citigroup.

Balance-sheet strength has made the credit crunch easier to bear for many companies. So far, stock-market investors have shown a willingness to reward big savers; cash-rich companies have outperformed their peers by 4.3 percent since the credit markets seized up in mid-2007, according to a report by Stendevad and others in Citigroup's investment-banking division. "If you exclude banks and auto companies, we haven't seen many Fortune 500 companies in distress yet," says Stendevad, "despite the world potentially entering the worst economic situation in the last 70 years." He adds, "That's in part because of this preparedness." With the global economic outlook bleak, investors are willing to pay a premium for foresight.

Managers might be forgiven for wanting to say "I told you so." After all, if they had listened to the most vocal investors two years ago, today they'd be cashless and dependent on a credit market that's all but ceased to function. Back in 2006 and early 2007, when debt was cheap and the only requirement for a loan was a signature and a pulse, some analysts saw cash as a sign of needless caution, and companies with a lot of it traded at a slight discount. Activist investors pressured corporate managers to open the floodgates. Stock buybacks and dividends were quick ways to spend down those piles of cash and quickly lift a company's stock price, they argued. The activists won some victories. Chevron and other commodities companies, awash in surpluses, have spent tens of billions of dollars repurchasing stock. Microsoft has done the same. And since 2003, almost every company in the S&P 500 has raised its dividend payments.

Nonetheless, the corporate coffers grew fatter and fatter. Partly this was because of record profit growth—for 18 consecutive quarters between 2002 and 2006, corporate earnings grew at a double-digit clip. Chief executives simply couldn't find a way to spend it fast enough. Even Federal Reserve chairman Ben Bernanke lamented the "softening in demand" for business spending in early 2007. It was easier to burn cash in the 1990s, when the torrid pace of innovation and the spread of the Internet required companies to upgrade their information and communications technology. Of course, that left a lot of companies cash-strapped when the dotcom bubble burst, and corporate default rates surged to 10.6 percent in 2001. That was a powerful lesson, and served to accelerate corporate Darwinism—the executives left standing in 2002 had a profound respect for cash.