The Wall Street Journal-20080202-The Buzz -- MarketWatch Weekend Investor- Credit Woes Hit in Unlikely Places

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The Buzz -- MarketWatch Weekend Investor: Credit Woes Hit in Unlikely Places

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If you don't think cash can go bad, you haven't been paying attention to earnings reports lately.

This past week, as strange as this may sound, Bristol-Myers Squibb was the latest company to do the equivalent of writing off cash when it took a $275 million charge against investments in debt that held such things as -- surprise! -- subprime and home-equity loans.

Companies don't really take charges against cash, of course, but investments that double as cash might as well be cash. Auction-rate securities, as these arcane investments are called, were deemed so safe that they sat on the balance sheet not far from Treasurys in a near-cash category called "marketable securities."

Until a few years ago, before a change in accounting rules, Bristol- Myers accounted for auction-rate securities as actual cash. They are so much like cash that they yield just a fraction of a percent above cash and, as Bristol-Myers regulatory filings say, can "be liquidated for cash at a short notice."

Bristol-Myers, which has traded auction-rate securities for nine years, is hardly alone. Chief Financial Officer Andrew Bonfield says his auditors, Deloitte & Touche, tell him they have around 70 clients "who are dealing with issues like this."

However, a growing list of non-financial companies, including 3M and US Airways, recently have been taking smaller but equally embarrassing charges against their own auction-rate securities investments, which are issued by municipalities and corporations and have been regarded as a safe cash-management tool for more than 20 years.

Then along came the mortgage mess. As The Wall Street Journal's Karen Richardson pointed out as far back as September, quite a few nonfinancial companies have cash exposed through direct investments in mortgage-backed securities. "Not all cash is created equal," is the way Merrill Lynch put it in a recent report that asked the question, "Are cash investments safe?"

This is important for investors, since a reason people buy technology stocks, and any stock during periods of volatility, is cash on the balance sheet. The Merrill report, by chief investment strategist Richard Bernstein, focused on tech companies that have an unusually high amount of cash in what Merrill deems could be credit- crunch-related risky investments.

Topping the list are Foundry Networks and Texas Instruments. Foundry's chief financial officer, Dan Fairfax, responded to the report last Tuesday, telling investors that Foundry believes its portfolio, which doesn't include anything mortgage-related, is sound.

Texas Instruments took it a step further, with Investor Relations Manager Ron Slaymaker telling me, "We fundamentally disagree with Merrill's report that Texas Instruments' cash investments are risky. In many ways the analysis was oversimplified and even superficial."

Merrill stands by its analysis, but Texas Instruments' reaction underscores that even among investments that are having problems, some are riskier than others. At Texas Instruments, for example, one-third of its cash is in auction-rate securities; another 15% is in mortgage- backed securities. But unlike Bristol-Myers, the auction-rate securities include none of the evil collateralized debt or loans.

"Essentially all of it is student loans are guaranteed by the Department of Education," says Treasurer Beth Bull. As for the mortgages, she says, none are subprime and half are in government- sponsored securities. She adds that Texas Instruments does its own independent analysis on mortgage purchases -- down to their average FICO scores.

That, as it turns out, may be a key difference between companies that have no problems and those that wind up feeling like their investments were booby-trapped. Enter auction-rate securities, which have triple-A and double-A credit ratings and have weathered multiple calamities, including the Orange County bankruptcy, Asian contagion and the tech bubble burst.

But even among them, there are differences. Some hold preferred stock of closed-end funds or government-backed student loans, which are regarded as lower risk. Others, as Bristol-Myers discovered, have mortgage, credit-card and other consumer-related exposure. "If you don't have an internal department responsible for doing credit reviews of independent securities, you rely on ratings agencies to do their job," says Mr. Bonfield, whose company has traded in auction-rate securities for nine years. "They were liquid, they never lost principal and they never had defaults."

Now, for those with mortgage exposure, the market has simply ceased to exist, which is where companies like Bristol-Myers got in trouble.

At Bristol-Myers, at least, don't expect to see auction-rate securities on the books in the future. "We're a pharma company, not a financial company," Mr. Bonfield says. He adds that the small bump in returns provided by auction-rate securities "is nowhere enough to justify the risk associated with these." There is only so much cash, after all, that companies are allowed to turn into trash.

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Herb Greenberg, MarketWatch senior columnist, doesn't own stocks except his employer's -- nor sell individual stocks short or invest in hedge funds. MarketWatch is a unit of Wall Street Journal publisher Dow Jones. Email [email protected]