SAN FRANCISCO (MarketWatch) — Berkshire Hathaway, the insurance focused conglomerate run by billionaire Warren Buffett, has been sitting on more than $40 billion in cash since 2004.
When stock markets climbed and the housing market soared from the end of the dotcom bust in 2003 to the middle of last year, Buffett struggled to find attractive investments as he followed his own advice of being fearful when others are greedy and greedy when the market is running scared.
Now, as thousands of Berkshire shareholders prepare for their annual pilgrimage this weekend to the company’s headquarters in Omaha, Neb., some are hoping Buffett has the crisis he’s been waiting so patiently for.
Since delinquencies and foreclosures began surging last year, house prices have slumped more than 10% across the U.S. The stock market is down about 9% from its peak in October 2007 and corporate bond spreads have ballooned — a measure of rising risk aversion. Financial-services companies have lost a quarter of their market value and Bear Stearns (BSC:The Bear Stearns Companies Inc
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“This year’s meeting is going to be so good because he’s really a tremendous recession/crisis investor,” Jeff Auxier, manager of the Auxier Focus Fund and a Berkshire shareholder, said in an interview this week. “He’s the type of investor who comes alive during these types of crises and he has the balance sheet to act.”
Snapping up securities
Berkshire (BRKA:berkshire hathaway inc del cl a
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BRKB 4,460.00, +3.00, +0.1%) has already snapped up some securities that have been particularly hard-hit by the credit crunch.
In February and March, the company built up a $4 billion position in auction-rate securities, Buffett told Fortune magazine in early April.
Auction-rate debt carries yields similar to long-term debt but acts like short-term investments because investors can sell at weekly or monthly auctions, when rates reset. The $330 billion market was used a lot by municipalities to borrow money, but it collapsed earlier this year, sending yields on some auction-rate securities soaring. See full story
As many investors and issuers fled the market, Buffett swooped in. In one instance, Berkshire bought securities issued by Citizens, a hurricane insurer backed by the state of Florida, at a yield of more than 11%.
The market was in such turmoil that the same bonds were selling on the same day at a 6% yields, Buffett told Fortune.
“We’ve got fabulous capital markets in this country, and they get screwed up often enough to make them even more fabulous,” he told Fortune. “I mean, you don’t want a capital market that functions perfectly if you’re in my business.”
Berkshire has also made big bets on high-yield, or junk bonds, which have suffered in recent months from the credit crunch.
The company owns derivatives contracts that require it to pay up if certain junk bonds default. They expire from 2009 to 2013. The company collected $3.2 billion in premiums on these contracts last year and paid $472 million in losses, Buffett reported in Berkshire’s latest annual report. See full story
“I expect we’ll hear about unusual investments in financial instruments that Berkshire has been able to make over the last few months during the financial turmoil,” said Thomas Russo, a partner at Lancaster, Pennsylvania-based Gardner Russo & Gardner.
Berkshire bought junk bonds in 2002, during the depths of the dot-com bust, and ended up making billions on the positions.
The current credit crisis has triggered even more forced liquidations of investment portfolios than in 2002, explained Russo, who’s largest investment is in Berkshire stock.
“This would have helped an investor with available liquidity and the ability to be nimble like Berkshire,” he added.
Berkshire has also started its own bond insurer, Berkshire Hathaway Assurance Corp., to try to grab lucrative municipal bond guaranty business from struggling market leaders Ambac Financial (ABK:AMBAC Inc
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Waiting for something worse
Still, Buffett has so far been noticeably absent from the bailouts of struggling financial institutions such as Bear Stearns and Washington Mutual (WM:Washington Mutual Inc
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WM 12.52, +0.23, +1.9%) in recent months.
He’s also shied away from buying complex mortgage-related securities such as collateralized debt obligations (CDOs), which have been among the hardest hit investments during the credit crunch.
For some Berkshire shareholders, that suggests Buffett may be waiting for markets to deteriorate further before making major acquisitions or investments.
“It’s very, very telling that he has not made any investments,” said Whitney Tilson, head of hedge fund firm T2 Partners LLC and a Berkshire investor. “Every major pool of capital in the world has made big investments in distressed financial institutions. He’s seeing every deal, so why hasn’t he done one? Maybe because he thinks things will get a lot worse.”
“We are well on our way to the kind of paralyzing financial crisis that would enable Buffett to put huge amounts of money to work at extraordinarily attractive valuations,” Tilson added. “But there are still so many other investors out there with so much money who are willing to invest before him.”
