Another misguided knee-jerk reaction is to reject reliance on rating agencies and do your own credit analysis, Epstein says. First, it's na??ve to think that a corporate treasury department can muster the resources to out-Moody Moody's across a broad spectrum of securities. Second, the rating agencies have been shaken up by their embarrassing downfalls. Now, under the stern glare of regulators and lawmakers, they will be considerably more reliable than they have been in the past. And there just isn't a realistic alternative, he concludes.

You can't get away from relying on agency ratings by turning to outside investment managers, Epstein points out. Most outside investment managers also rely on agency ratings or stick to securities whose creditworthiness is so transparent as not to require in-depth credit analysis.

Managers who do independent credit analysis usually do it to find undervalued instruments that represent investment opportunities–engaging in the very risk treasury staffs are most anxious to avoid these days, he notes.

But Epstein agrees that many corporate investment policies are flawed and need to be rewritten. An old policy might limit the portfolio to 10% in asset-backed securities, or worse yet, to 10% in asset-backed securities by any one issuer, as long as they're rated AA or better, he illustrates. A broker could push ARSs that technically would be from different issuers with different CUSIP numbers, but they would be fundamentally the same and build a dangerous exposure. "If one went bad, they'd probably all go bad," he explains.

A good investment policy going forward, says Anthony J. Carfang, founding partner of Treasury Strategies Inc. in Chicago, will apply risk and diversification standards at the portfolio level, not just restrict individual instruments. And they will more precisely enforce diversification among asset types by imposing stricter, more granular limits, except that no limits should be placed on insured bank deposits, Treasuries or on Treasury, government or prime institutional money funds, he says. Investment must not operate as a separate treasury silo but be integrated into the company's core liquidity management strategy, supported by a solid technology platform, Carfang insists.

You have to manage not just for safety, liquidity and yield but also for portfolio exposure, Epstein agrees. The mechanisms built to prevent too much exposure to a single issuer or a single asset class didn't work well. "There are a lot of ways to slice and dice a portfolio to prevent undue exposures, but it's something treasury staffs need to rethink," he says. Instead of relying on simple labels, probe deeper into portfolio exposures and then slice and dice to control those exposures, he advises. For example, you can control exposure to certain industries with limits on how much paper you can hold from financial issuers, with sublimits for banks, insurance companies and brokers. But be consistent and don't move a group of issuers from one category to another, he advises.

Wall Street did pull a fast one to get a lot of ARSs, including those backed by credit default swaps, highly rated, Epstein concedes. Evidence of a growing problem was widely ignored. "Credit default swap spreads widened to the greatest ever, yet treasuries continued to buy them. Many cash managers probably didn't know there was a credit default swap index. If they knew and watched it, they probably saw it was time to get out."

You don't have to reinvent the wheel, Deutsch points out. A lot of companies are going through the process of revising investment policies now and asking trusted advisers for help. Those advisers are familiar with emerging best practices and can offer advice or even sample language, he notes. "If you use outside managers, have a dialogue with those managers about what they're seeing and how they think you can draft a policy that fits your intended strategy," he says.

Treasuries need to stop relying on brokers as investment advisers they don't have to pay.If you allocate cash to an outside investment manager, be sure to use one who charges an asset-based fee, and steer clear of any that make their money on spreads, Deutsch recommends. Start with agency ratings, but dig deeper to see what is behind the ratings, especially for complex securities, Deutsch advises.