As they say, cash is king. At the core of our financial crisis is a lack of liquidity stemming from increasingly over-leveraged banks and large financial firms. They did not have sufficient liquid assets to prevent a decline in their credit ratings, nor cover their non-performing assets, and a run on their stock occurred. The U.S. economy, however, is not set up to prosper with hoards of cash; it thrives on a steady movement of money from one source to another. Credit is key. The nation’s banks and thrifts are so interwoven with inter-bank lending, that a glitch in the system causes more than a financial hiccup, but outright cardiac arrest. With the credit system in arrest, the phrase “cash is king” has never rung more true. In the business world, those who are awash in cash and are well-capitalized are positioned to ride out the current economic storm. The economic indicators are clearly signifying a contraction, and a lack of credit availability for the nation’s businesses will only widen that recession. If not quickly repaired, a recession could ultimately turn into an outright depression.

Americans With Cash

Data issued from the Federal Reserve proves to be enlightening, particularly the information about individual household cash reserves. Some numbers from various sources:

As measured by the Federal Reserve in 2007, Americans have $7.4 trillion of liquid cash in checking, savings, and money market accounts, and another $4.1 trillion in treasury notes and bonds. This is less than the $8.9 trillion in 2000. The total amount of $11.5 trillion total could, quite literally, pay off every outstanding mortgage of every American. However, the equity that Americans have in their homes has fallen to 46%, down from a high of 57% ten years ago, and the value of housing has dramatically fallen during the past 18 months.

Healthy Financial Institutions

During the past six weeks, as the U.S. Federal Reserve has taken over or intervened in failing banks and investment banks, and the FDIC, a branch of the Treasury Department, has been praised for its swift efforts to keep open branch locations, and movement of depositors funds into other secure banks for easy and panic free access by customers. Many of the failed institutions were leveraged to the point of no return when they did not have the cash or equivalent reserves to cover risky investments that were ill performing. Within the industry, the average ratio of an institution’s non-performing assets as compared to total assets is 1.2%. According to SNL Financial and Forbes Magazine, some of the significantly healthy institutions in terms of cash and reserves have only 0.6% of their assets classified as non-performing, and have reserves equal of 168% to cover them. Some of the institutions who are well-capitalized and have appropriate reserves include: Bank Of America with 0.6% of its assets considered non-performing and with a 168% reserve; State Street Corporation with 0% in non-performing assets and a 600% reserve on hand in case assets become non-performing; and JPMorgan Chase with 0.4% non-performing with 213% of reserves to cover them; and Northern Trust Corporation has just 0.1 % with 501% of Reserves to protect them.

Well Positioned Mutual Funds

Many investors in the U.S. have their cash in mutual funds that invest in a range of securities and bonds, spreading out their vulnerability to market highs and lows. Some of the mutual funds have an enormous amount of cash on hand and are able to purchase securities at bargain prices. Forbes Magazine and Lipper Analytical Service reported that Federated Kaufmann-A’s mutual fund had $10 billion in assets as of late September with 19.3% of it in cash. American Funds has three mutual funds with staggering numbers. Its Growth Fund had $179 billion in assets with 13.6% of it in cash, while its Investment Company of America fund totals $75 billion assets with 13.1% of cash. Its American Mutual-A fund $18 billion of assets with 11.9 percent of it in cash. Fidelity’s low-priced stock fund holds $29 billion in assets, of which 10.5% is cash, and its Contrafund holds $70 billion, with 8.6% of cash.

Companies with High Cash Positions

Companies that have strong cash positions are well situated to either ride out a long economic recession or seize upon opportunities to increase assets on their balance sheet. Companies that fall into this category include: Exxon Mobil—over $35 billion; Pfizer with $25 billion; Cisco and Coca Cola at $500 billion, and Berkshire Hathaway at over $10 billion. Other firms that score well in their ratio of cash to market value are: Dell with a market value of $33.8 billion and 27% cash position; Expedia– $4.5 billion and 23% cash; Hewlett Packard with $115.3 billion market value and 13% cash; Intel with $108.6 billion and $11 billion cash; and Nike with $31.7 billion and 9% cash.

What to Watch

A possible misunderstanding of the public, is that with the passage of the $700 billion Emergency Economic Stabilization Act, the risk of U.S. banking institutions failing has lessened. While the FDIC does not publish its bank watch list, it does recommend several services that publish bank ratings list for a fee. One of the recommended sites is Bankrate.com. It is relatively easy to access the individual status of a bank by state.

Bankrate.com provides a rating system as below:
Ratings structure
Below is an explanation of Bankrate’s Safe & Sound CAEL rating system for commercial banks, savings institutions, and credit unions:

Safe & Sound CAEL rating system	Star Rating
1 Superior	5 stars
2 Sound	4 stars
3 Performing	3 stars
4 Below peer group	2 stars
5 Lowest rated	1 star
No Report — Complete data not available	NR
Closed	Institution is closed
G	Designates high growth