You are right.
Does this mean BRK does not get the benefit ( ~$4B+ to ~6B+) of interest rate hikes on its $128B cash but all the downside with its equities ?
No. It means:
- Berkshire gets the benefit of higher interest rates, because short-term rates are going up faster than long-term rates. Heck, earlier last week, the 2-year was yielding a FULL POINT more than the 10-year!
- Berkshire, of course, does bear all the downside … and upside … of its equities. And over time, equities usually rise, so more probability of upside than downside. Certainly well chosen ones (or “all of them” as a whole - re: index funds).
But that isn’t the point. Berkshire is a big business. Sure, some of their sizable insurance reserves might be in longer term bonds, but their whole raison d’etre is to use some of the insurance float for better investments than whatever the long term bonds happen to be yielding at the time. And they are VERY conservative with regards to duration risk and counterparty risk. Recall a few years ago when Berkshire wanted an instrument to “bet” on the overall market not going down dramatically over a certain period. They chose to sell puts … why? … because when you sell puts, the money is HELD BY YOU, not by someone else who may pay you later, and not in an instrument that has to be sold on the open market later. That eliminates counterparty risk.
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Is this accurate ? Seems like AR says short term is 3 months or less for liquidity.
I don’t see anywhere that they invest in 2 year treasuries yielding 4% - 5% as you are asserting.
Here is what AR says
Then
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That’s not what it says. The footnote says that 3 months or less were $2.6B at Dec 31, 2022 and were $61.7B at Dec 31, 2021. That’s only a portion of their treasuries. A large portion at end of '21, and very small portion at end of '22.
If you look at the Berkshire annual report, you will the the big statement that highlights the bad decision at SVB.
Treasury bills comprise 4-week, 8-week, 13-week, 17-week, 26-week, and 52-week maturities. Most often, people/companies will ladder them across the spectrum. That’s what I do for my treasury bills. Last week, even the 8-week auction resulted in almost 5% (4.937%). The 26-week, for example, yielded 5.183%, and the 17-week yielded 5.216%. I bought all of them as usual (I have money in the bank to cover a few years of expenses, and the T-bills are yielding far more than the bank offers on ANY of their products).
And THAT was one of the big problems at SVB … they offered paltry interest rates on their deposits. When T-bills yielded under 1 or 2 percent, most customers didn’t mind too much, but now that T-bills are near/at 5 percent, the customers won’t stand for it anymore and move their money to money market funds (that buy T-bills among other things) or directly into T-bills.
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If you recall, Berkshire has reduced its allocation for the bond portfolio for sometime. Typically insurance companies carry a significant bond portfolio and Berkshire allocation for bonds are lower than usual for the last few years.
In the short-term Berkshire, WEB may have scarified some return, but they really plan for any long-term, potentially existential issues.
Imagine Berkshire with its current size and WEB is 60 instead of 90.
There are two amounts
Short-term investments in US Treasury Bills : $92B is cash and cash equivalents is
I can’t find any breakdown of the above
The $25B in fixed maturities is
Seems like there is about $45m mark to market loss on those and maturity is spread out over 10 years.
Market perceives that BRK has the same problem as SVB.
I posted data in my previous post. It does look like BRK has a very small exposure to long term fixed maturity securities but nothing meaningful.
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FRC since SVB collapse has seen $70B deposits leave. This is what going to happen across all regional banks. Everyday Jay Po drags his feet, another bank goes down. This whole “tax payer bailout” non-sense needs to be set aside and FED, FDIC and Biden Admin should get together and preserve. As regional banks goes down, so is economy.
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Yes, I had changed my mind within hours of making that post. As, apparently, had several of the people with their hand on the actual stick.
Generally speaking, yes. The easiest thing to do would be to backstop any bonds that the banks have at par. Since the banks can’t hold them in the face of a run, but the Fed can, this would fortify any bank caught in this situation.
However it also gives a free ride to everyone who bought and guessed wrong, so perhaps there should be some mechanism in there whereby any bank taking advantage of the offer also has to take a minor haircut of some kind. My preference would be that the CEO and Executive Committee don’t get any bonus for, say, two years - but the bank remains solvent and both depositors and shareholders don’t get killed.
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FED and Yellen basically acknowledged when they asked JPM’s of the world to deposit the money that left FRC back into it. FRC of course is going to pay the market rate and FED again engineered to make money for the big bank.
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