Allan Sloan FORTUNE
The Deal by Allan Sloan Full coverage

Two small lessons from the market turmoil

In all the anxiety over turbulent markets, it's easy to lose sight of what has and hasn't changed. Fortune's Allan Sloan spotlights two eternal financial verities.

By Allan Sloan, Fortune senior editor-at-large

NEW YORK (Fortune) -- There have been plenty of people talking about the big lessons we should learn from the subprime debacle that has been messing up markets this summer. So today, I'd like to depart from form, and talk about two small lessons, instead. One of them involves takeovers, the other involves investments.

Takeovers first. You'd think from reading and hearing the business news that corporate takeovers are dead because the leveraged buyout crowd - which now calls itself "private equity" - has lost its access to endless streams of cheap money, thanks to the belated recognition by lenders of the risks they were taking with LBO loans.

But corporate takeovers aren't dead - they never are. However, instead of the big flashy deals being done by LBO houses, they'll be done by corporations.

Corporations are what's known in the deal biz as "strategic buyers," as opposed to the LBO guys, who are "financial buyers." Ever since KKR (then Kohlberg Kravis Roberts) did the first big LBOs of public companies 30 years ago, the role of financial buyers has waxed and waned, relative to the strategic buyers, as market trends shifted.

This time around, the financial players' role peaked just as "private equity" was becoming a household term. 'Twas ever thus - about the time that something becomes wildly popular, it's getting to be so over. But even though the LBO deals got most of the ink, typical boring corporate takeovers accounted for most of the dollar value of the deals being done.

Now, with many of the big pending LBO deals having trouble lining up financing, LBOs are moving rapidly from peak to trough in terms of market share. But corporations are still there, are still loaded with cash, and can still print deal currency by exchanging their own stock for the target company's stock.

So you'll see more deals by corporations, probably at lower prices relative to assets, profits and cash flow than LBO deals were. But trust me, there will still be plenty of big takeovers - they'll simply be strategic rather than financial. At least until the cycle turns again. Which it will.

Now, on to lesson No. 2: there's no such thing as a risk-free investment - not even a money market fund that owns nothing but U.S. Treasury securities. Let me explain. One of the shocking pieces of news to emerge last month was that some money market funds - which we generally think of as ultra-safe - had exposure of sorts to the meltdown in the subprime mortgage market. By contrast, holders of Treasury market funds don't have to worry about Uncle Sam defaulting on his debts.

However, there's a catch. Even though you're not risking your capital when you stash your dough in a Treasury money fund, you're risking something: your income. Yields on short-term Treasury securities have plunged because investors seeking a safe haven have poured so much money into that market. The average Treasury fund yielded 4.20 percent on Aug. 14, according to iMoneyNet. The most recent yield: a mere 3.62 percent. That's a 15 percent drop in a bit over three weeks.

During that same period, the average yield on "prime" money funds has actually risen, iMoneyNet says, and is up to 4.64 percent from 4.56. In other words, the spread between Treasury funds and other funds has almost tripled - to 1.02 points from 0.36 of a point - almost overnight.

The point here is an old one, but it's worth repeating. If you go for high returns by buying stocks or long-term bonds or various financial exotica, you're risking your capital because the price of your investments can fall. But if you decide to keep your capital safe by buying Treasury money market funds (or short-term Treasury securities or certificates of deposit), you risk your income because the yield on your investment can drop.

There's no such thing as a free lunch. Or an investment that's totally risk-free.  Top of page