129
Many manufacturing companies,
such as Brazilian paper company Aracruz
(known as Fibria since 2009), used the
treasury function to make money, not just
manage it, from the 1980s onward.
See also: Managing risk 40–41 ■ Hubris and nemesis 100–03 ■ Investment and
dividends 126–27 ■ Who bears the risk? 138–45 ■ Leverage and excess risk 150–51
MAKING MONEY WORK
as quadrupled oil prices and
“stagflation” (where inflation and
unemployment are both high at the
same time). The idea emerged that
the goal of a company’s treasury
function (the department responsible
for stewarding its finances) should
be to achieve the optimum balance
between liquidity and income from
the company’s cash flows.
During the decades leading up
to the 2007–08 financial crisis,
large companies steadily added
greater responsibilities to the
treasury function. Often, these
began as ways to minimize risk,
but the opportunities for profitable
trading became very tempting—to
the point that some companies took
out contracts on financial hedges
that were worth more than all their
export earnings. For example, in
2008, the Brazilian paper and pulp
company Aracruz used cash assets
to make bets on currency futures
(the value of currencies at a future
date). Specifically, it bet that the
Brazilian currency would continue
to rise, but in fact it underwent a
sharp devaluation and the company
ended up losing $2.5 billion.
As a result, some companies now
spell out their opposition to making
money from money. Mining
multinational Rio Tinto, for example,
stated in its 2013 annual report that
its treasury “operates as a service
to the businesses of the Rio Tinto
group and not as a profit center.”Shadow banks
Other companies, however, have
extended the treasury function to
become a major, or even majority,
profit center for the business.
Companies such as US
conglomerate General Electric (GE)
have developed this function into
an effective “shadow bank.” In
2007, GE’s treasury function GE
Capital held over $550 billon of
assets, making it larger than some
of America’s top ten banks. It
contributed 55 percent of GE’s
profits, mainly by borrowing money
short-term to lend to customers
over the long-term (“borrowing
short and lending long”). GE was
able to flourish as a member of the
shadow banking system without
having to bear the regulatory
burdens of banks. By 2008,
however, it was forced to ask to
participate in the US government’s
banking sector bail-out program.
Making money from money
carries serious risks, whether the
bets go wrong or not. This is
because the more profits a
company’s treasury generates, the
less willing the board may be to
invest in research and development
for the future growth of the company.
This way of making money from
money is strongly correlated with
short-termism in business. ■Treasury in focus
For the decade prior to the
financial crisis of 2007–08,
many companies began to use
short-term financing to fund
long-term capital expenditure.
However, the financial crisis of
2007–08 changed conditions
dramatically, as banks
collapsed or came close to
doing so. CEOs demanded to
know where their company’s
cash was, and the real-time
cash position. Not all
treasurers were able to
provide immediate answers,
since some of their
investments were in local,
manually operated, less-than-
transparent systems.
As a result, the treasury
function has moved to the
forefront for many companies,
with an increased need for
transparency and up-to-the-
minute accountability. Boards
expect treasurers to be
prepared for the unexpected—
such as by increasing cash
reserves to reduce liquidity
risk. However, this brings up a
new problem for the treasury
function: if more cash is kept in
reserve, how can this surplus
liquidity be used most
effectively to fund growth?The line separating
investment and speculation
is never bright and clear.
Warren Buffett
US investor (1930 –)