In the midst of an ugly recession, we've been hearing about personal savings skyrocketing to levels not seen for more than a decade. As people become increasingly worried about their economic prospects, they start hoarding cash. That's a rational reaction. The same mentality is driving corporations to build up their treasuries. I believe that's good news.

Bloomberg reports:

Even as government reports show that the first global recession since World War II may be easing, corporate treasurers are raising cash as fast as they can, wary of losing access to capital. Corporate defaults reached 10.7 percent worldwide in July, the highest since 1991, according to Moody's Investors Service.



How much are they saving? Bloomberg continues:

Cash reached a record $2 trillion in the first quarter, 8.3 percent of assets.



The problem with the credit crunch was that most big companies relied very heavily on financing. When that financing dried up, they had major cash flow problems. Some even had trouble covering regular operating expenses, which is usually a death sentence for a firm. One of Reuters' sources explains:

"There's going to be a generational psychology shift as to how you and I and the rest of the world think about finance," said Jonathan Fine, a managing director on the investment-grade syndicate desk at Goldman Sachs Group Inc. in New York. "People will keep cash on hand so long as what happened in the last two years remains so visible in the rearview mirror."



And:

"The days of excessive leverage are over," said Scott Minerd, who helps supervise more than $100 billion as chief investment officer of Guggenheim Partners LLC in Santa Monica, California. "Having term financing in place and not having yourself be vulnerable to a refinancing event is an important feature in every balance sheet."



Some people will be bothered by this trend. The conventional wisdom, especially in Washington, is that these firms should be spending that money, not hoarding it. By spending the money, they can hire more employees and spur more economic activity. Those who believe this have a similar lament regarding individuals who they wish would spend money to stimulate the economy, rather than save.

I, however, think that firms building up their capital base is a very good trend. If companies had been better capitalized, then the credit crunch would not have mattered as much. Their very existence would not have been jeopardized by their inability to secure new financing.

Certainly, there is a happy medium to be reached. You don't want companies hoarding every penny they make. Anyone who has studied corporate finance will tell you that some amount of debt makes for higher profitability. But anyone who thinks that many companies, especially banks, were not vastly overleveraged must have been sleeping last fall.

When things get better, this savings trend will likely dissipate. But I hope that firms' memories are not too short. Retaining a sufficient amount of capital in a corporate treasury for a rainy day seems utterly sensible to me. As we learned last year, a storm can sometimes be much worse than anyone anticipated.

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