Treasuries burned by investments in supposedly safe, tradeable securities that suddenly became illiquid are pinning the blame on loose investment policies, rating agencies that failed to detect underlying credit risk and brokers who carelessly sold instruments to treasury investors that neither understood. Now staffs are considering how to fix these problems and prevent a next time. Investment experts have plenty of suggestions.

Revising investment policies can be as simple as defining a narrower group of safer securities that will be eligible for the portfolio, explains Robert Deutsch, managing director and head of global liquidity products at JPMorgan Asset Management. "A lot of policies were too broad and let in types of securities that proved to be bad investments over the past year," he notes. But investment policies should stay flexible enough to keep pace with market innovations, particularly in structured securities, Deutsch says. "Be sure you have a process to review new types of structured securities before you buy them and understand what you're really buying."

And avoid knee-jerk reactions, urges Lee Epstein, CEO of San Francisco-based Money Market One, a broker/dealer that works exclusively with corporate cash investors. The easy way to tighten an investment policy is to ban certain now-tainted securities. If you're holding auction-rate securities (ARSs) you can't sell and arguing with your auditors about how they should be classified, just rewrite the policy to say no more auction-rate securities will be acceptable. But that's useless, Epstein says. "Do it if it feels good, but you're banning a security that will never trade again in the foreseeable future."

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