Big Business Is Not to Blame

Kevin Warsh, a governor at the Federal Reserve, surmises that globalization may have played a role, too. When multinational companies earn profits overseas, they face a tax hit when they bring the money back into the United States or Europe. "Many companies have an incentive to leave those funds with their foreign subsidiaries," Warsh said in a 2006 speech. That encouraged managers to park foreign earnings in overseas money-market funds indefinitely. Indeed, the facts bear him out: multinational firms became much more cash-intense more quickly than domestic-only companies.

Whatever the reason for the buildup, CEOs are now happy to have their cash cushions. But do they have enough to weather the storm? Mark Zandi, chief economist of Moody's Economy.com, says they don't. In normal times, cash is meant to be spent, but in this environment, it's more like an insurance policy against catastrophe. That makes corporate cash reserves less like a checking account and more like China's $2 trillion foreign-currency hoard, which protects against a currency collapse. The parallels don't stop there: China, Brazil and other large emerging markets have followed sound policies in the past decade, building up reserves and adopting prudent economic policies—just like Fortune 500 companies. And just like China and Brazil, good behavior hasn't immunized them from the financial contagion spreading around the globe. "Most nonfinancial businesses did all the right things coming into this downturn," says Zandi. "But they've been overwhelmed by how bad things have gotten—how bad the collapse in sales has been, how tight credit has become."

The situation is worse at the bottom of the corporate pyramid. Some smaller companies, especially those targeted in leveraged buyouts, are saddled with debts that may go unpaid now that the economy is crumbling, and there's little chance they'll be able to woo new lenders any time soon. But even AAA-rated businesses like ExxonMobil would pay a hefty premium to borrow should they need to, says Zandi, and they worry that the premium could grow even larger. Worries like that cause even cash-rich companies to wish they had more of the green stuff, and they're cutting jobs and investment to avoid tapping into whatever they already have. "If they run out of cash, they're not sure where they can turn to," says Zandi; the troubles in the financial sector make their piles look puny in comparison. So while conventional wisdom holds that cash is now king, it lacks the magisterial authority to make problems disappear.

© 2008