Page 131 - (DK) The Business Book

MAKING MONEY WORK 129

See also: Managing risk 40–41 ■ Hubris and nemesis 100–03 ■ Investment and Treasury in focus
dividends 126–27 ■ Who bears the risk? 138–45 ■ Leverage and excess risk 150–51
For the decade prior to the
financial crisis of 2007–08,
to rise, but in fact it underwent a
many companies began to use
sharp devaluation and the company
short-term financing to fund
ended up losing $2.5 billion.
long-term capital expenditure.
As a result, some companies now
However, the financial crisis of
spell out their opposition to making 2007–08 changed conditions
money from money. Mining dramatically, as banks
multinational Rio Tinto, for example, collapsed or came close to
stated in its 2013 annual report that doing so. CEOs demanded to
its treasury “operates as a service know where their company’s
to the businesses of the Rio Tinto cash was, and the real-time
group and not as a profit center.” cash position. Not all
treasurers were able to
Shadow banks provide immediate answers,
since some of their
Other companies, however, have
investments were in local,
extended the treasury function to
Many manufacturing companies, become a major, or even majority, manually operated, less-than-
such as Brazilian paper company Aracruz transparent systems.
(known as Fibria since 2009), used the profit center for the business. As a result, the treasury
treasury function to make money, not just Companies such as US function has moved to the
manage it, from the 1980s onward. conglomerate General Electric (GE) forefront for many companies,
have developed this function into with an increased need for
as quadrupled oil prices and an effective “shadow bank.” In transparency and up-to-the-
“stagflation” (where inflation and 2007, GE’s treasury function GE minute accountability. Boards
unemployment are both high at the Capital held over $550 billon of expect treasurers to be
same time). The idea emerged that assets, making it larger than some prepared for the unexpected—
the goal of a company’s treasury of America’s top ten banks. It such as by increasing cash
function (the department responsible contributed 55 percent of GE’s reserves to reduce liquidity
for stewarding its finances) should profits, mainly by borrowing money risk. However, this brings up a
new problem for the treasury
be to achieve the optimum balance short-term to lend to customers
function: if more cash is kept in
between liquidity and income from over the long-term (“borrowing
reserve, how can this surplus
the company’s cash flows. short and lending long”). GE was
liquidity be used most
During the decades leading up able to flourish as a member of the
effectively to fund growth?
to the 2007–08 financial crisis, shadow banking system without
large companies steadily added having to bear the regulatory
greater responsibilities to the burdens of banks. By 2008,
treasury function. Often, these however, it was forced to ask to
began as ways to minimize risk, participate in the US government’s
but the opportunities for profitable banking sector bail-out program.
trading became very tempting—to Making money from money
the point that some companies took carries serious risks, whether the The line separating
out contracts on financial hedges bets go wrong or not. This is investment and speculation
that were worth more than all their because the more profits a is never bright and clear.
export earnings. For example, in company’s treasury generates, the Warren Buffett
2008, the Brazilian paper and pulp less willing the board may be to
US investor (1930–)
company Aracruz used cash assets invest in research and development
to make bets on currency futures for the future growth of the company.
(the value of currencies at a future This way of making money from
date). Specifically, it bet that the money is strongly correlated with
Brazilian currency would continue short-termism in business. ■