, suggesting that investors continue to have a favorable outlook for corporate credit quality. despite some recent turbulence, owing in part to geopolitical events, stock prices have logged robust gains over the past 3 - 1 / 2 years, and broad equity indices have now retraced most of the ground lost between 2000 and 2002. some of the improvement in the financial condition of businesses is due to substantial efficiency gains by firms. moreover, the resulting robust gains in labor productivity have been well ahead of compensation growth and have dramatically boosted corporate profits. indeed, profits as a share of sector product - in essence profit margins - jumped to more than 14 percent in the first quarter, the highest level in decades. the improvement in the financial conditions also reflects fundamental changes in firms ’ balance sheets. in particular, firms have boosted their liquidity by extending debt maturities, replacing shorter - term debt with longer - term debt ; at the same time, they have reduced total leverage. many firms retired debt using proceeds from equity offerings, asset sales, or mounting profits. as a result, from 2002 to 2004, nonfinancial corporate debt grew at an annual rate of about 2 percent, its slowest pace since the early 1990s. one of the most striking financial developments since 2001 has been the rapid increase in corporate holdings of cash and short - term securities. since the end of 2001, the ratio of cash holdings to assets i should note that i am expressing my own opinions, which are not necessarily those of my colleagues on the board of governors of the federal reserve or on the federal open market committee. nellie liang and steve sharpe, of the board ’ s staff, contributed to these remarks. has risen sharply ( see exhibit ). 2 this increase is even more pronounced when ( on a consolidated basis ) cash is measured relative to investment, defined as the sum of capital spending and research and development ( r & d ) spending during the preceding twelve months. the ratio of cash to investment has averaged about 60 percent during the past few decades. generally, it is higher in recession periods, consistent with a strong precautionary savings motive by firms that face costly external financing ( almeida, campello, and weisbach, 2004 ). and, in 2001, the ratio of cash to investment was already somewhat elevated. but the ratio then soared to more than 150 percent by year - end 2004, as investment fell far short of cash flow from operations and net financing. this juxtaposition is unusual when the economy is

advised banking organizations considering expansion or other activities requiring the filing of applications with the federal reserve to concentrate instead on their bsa / aml programs. while not the full equivalent of an enforcement action, i am sure that you can appreciate the fact that every banking organization that is seeking or planning on seeking federal reserve approval of an application makes every effort possible to ensure that its anti - money laundering program is considered to be fully satisfactory by examiners and that any deficiencies that may be identified are addressed as expeditiously as possible. the applications process gives the board a strong tool in the bsa / aml area. guidance to banking organizations turning back to the federal reserve ’ s normal supervision process, board and reserve bank supervisors seek to provide guidance to banking organizations to assist them to fully understand applicable regulatory requirements and what is expected by the regulators. while financial institutions are, of course, fully responsible for their own compliance, the supervisors play an important role in ensuring that regulatory requirements are correctly understood and uniformly applied. this is particularly true in areas such as compliance with new regulations promulgated since the usa patriot act. the federal reserve views its supervisory role as including initiatives to enhance awareness and understanding by examiners throughout the federal reserve system, by banking organizations under federal reserve supervision, and by the financial industry at large. to promote a full understanding of anti - money laundering requirements, the federal reserve issues supervision and regulation letters, which are used to advise reserve bank supervisory staff, supervised institutions, and the banking industry about policy matters ; provides on - going training to examiners ; speaks regularly before the financial industry ; and issues guidance in conjunction with other regulators and treasury. these initiatives are meant to respond to or anticipate questions that arise regarding anti - money laundering requirements. the federal reserve is keenly aware of the resources that anti - money laundering and counter - terrorist financing requirements demand of financial institutions and believes that it is our duty to assist them in meeting their obligations. federal reserve resource commitment the federal reserve ’ s bsa / aml function ranges from supervising and regularly examining banking organizations subject to federal reserve supervision for compliance with the bsa and relevant regulations, to requiring corrective action for detected weaknesses in bsa / aml programs, to enhancing money laundering investigations by providing expertise to the u. s. law enforcement community, and to providing training to u. s. law enforcement authorities and various foreign central banks and government agencies. over the past three years, for example, federal reserve experts in bs