Warren Buffett offers several lessons to CEOs of financial companies and one of them is that they need to be chief risk officers of their institutions in order to avoid crisis.
much has been done about Lack of a Chief Risk Officer But
(ticker SIVB) for much of the past year and the bank’s ill-fated investments in Treasury and mortgage securities. Losses on SVB’s bond portfolio, including $15 billion on the largest group of securities holdings, helped ruin the bank.
While a chief risk officer does some valuable work, it was up to the CEO, Greg Baker, to oversee things.
Buffett, 92, holds almost every major leadership role
(BRK/A, BRK/B). He is the chairman and chief executive officer, while overseeing the bank’s vast investment portfolio of approximately $350 billion in stock, $129 billion in cash and $25 billion in bonds. The idea that someone else would monitor risk at Berkshire would be anathema to Buffett. Berkshire’s Class A shares fell 0.5% on Thursday to $446,395.
Buffett also demonstrated how financial companies should be managed in a low-rate world. Buffett, who realized that bonds offered a terrible risk/reward, decided to buy 1% or 2% long-term Treasuries or mortgage securities.
Bank of America
(SHW) did. (Schwab’s bond portfolio of more than $300 billion consists of federal agency mortgage securities maturing in 10 or more years. The holdings, the company said, are more like an intermediate-term portfolio based on a duration, or interest rate, of a single term.) Behaves more sensitively, about four years old.)
By doing so, Berkshire gave up some interest income, but avoided large bond losses. And Berkshire kept its bond maturities relatively short and ended the year sitting on a paper loss of only $45 million on a $25 billion portfolio. Now, the company is making profit as it invests in treasury bills and gives 4% return. Berkshire’s interest income nearly tripled last year to $1.7 billion and is expected to at least double in 2023.
Of course Berkshire is unusual. Buffett largely takes risk by investing heavily in stocks, but Berkshire’s insurance units have vast capital bases and can invest. Meanwhile, insurance customers cannot demand payment unless they have valid claims, unlike a bank depositor who can withdraw money at a moment’s notice. Holding stocks instead of bonds has also been a better move for Berkshire over the long term, and it didn’t lose much compared to bonds last year.
Of course, Buffett has enormous autonomy and the company is not subject to any pressure from analysts or investors to hit earnings targets. It would have been difficult for bank CEOs to do what Buffett did and accept lower near-term earnings and take on less risk in 2020 and 2021, but that is arguably what they should have done.
He is the Chief Risk Officer. after all.
Write to Andrew Barry at [email protected]