There is an interesting little article on the second page of the second section in Saturday’s (2/2/08) WSJ. It’s sort of obvious when you think about it. When companies list “Cash” on the balance sheets, they don’t really have greenbacks stuffed in the corporate mattresses. They’ve the cash invest in cash equivalents. These instruments are investment vehicles for which there’s a ready market so that they can be sold instantly to raise cash. No large mystery here.
Securitized bond backed by sub-prime mortgages used to be considered cash equivalent investments. Oops. You may have seen or will soon see non-financial corporations taking write-downs against cash. Their bonds that they have which are backed by sub-prime mortgages no longer have a ready market and sometimes no market at all. Hence, they are no longer think about cash equivalent investments.
When you are looking at a company as an investment for your funds. If one of the big reasons you’re thinking of that company is because they’ve lots of cash on hand, you need to think again carefully. You need to find out if that company has significant exposure to sub-prime mortgage bonds.
Well, nuts.
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