There’s been a lot of focus on the fact that Silicon Valley Bank lacked a chief risk officer for most of 2022, and the role that may have played in the bank’s ill-fated investments that caused its collapse last month. But many banks don’t retain a chief risk officer; it’s up to their CEOs to manage risk, contends an article in Barron’s.
Managing risk is just one of the many things that Warren Buffett oversees in his role as chairman and CEO of Berkshire Hathaway, with an investment portfolio of roughly $350 billion in stocks, $25 billion in bonds, and $129 billion in cash reserves. During the years when low rates reigned supreme, Buffett refused to buy the 1% and 2% long-term Treasuries or mortgage-backed securities while Bank of America and Charles Schwab snapped them up. He may have given up some interest income, but he also sidestepped major bond losses with the move. By keeping their $25 billion portfolio’s bond maturities on the shorter side, Berkshire saw paper losses of only $45 million, and as the company now invests in Treasury bills with a 4% yield, its interest income tripled last year and will most likely double this year, according to the article.
Buffett takes risk by investing mainly in stocks, but he has the cushion that Berkshire’s insurance businesses, with their huge capital bases, provides. And insurance customers can’t yank their money out of a policy the way bank customers can withdraw their money from a bank institution. So it makes sense for Berkshire to hold more stocks than bonds in the long term. Of course, Buffett wields a significant amount of control at Berkshire, and the company doesn’t have to bow to pressure from investors to hit certain earnings goals. And while a typical bank CEO, such as Greg Becker of SVB, wouldn’t have the same kind of control and means to make the same choices that Buffett was able to make, perhaps it’s something he should have considered in order to avoid collapse.