Buffett Cuts His Municipal Credit Bet By $8 Billion

It has come to my attention that Berkshire Hathaway is going to a eliminate half of its bullish $16 billion bet that it has against the quality of the credit of the US towns, cities and states. The company is also cutting its exposure to corporate debt at high yields, which they mentioned during a regulatory filing that they made this month.

As many investors already know, Warren Buffett believes that there is going to be an uptick in municipal bankruptcies across the United States. Buffett mentioned this last month when he talked about the three California cities that filed Chapter 9 municipal bankruptcy just weeks apart from each other. He believes that because these cities filed bankruptcy, they basically opened the floodgates for others to follow.

Berkshire Hathaway actually sells protection against many of these towns, cities or states defaulting by a vehicle known as credit default swaps. The way these contracts work is Berkshire Hathaway is going to have to reimburse its counterparty for losses of debt if they were to ever file municipal bankruptcy.

Berkshire Hathaway told us that they have come to an agreement with a counterparty to eliminate $8.25 billion worth of all of these positions that they currently have. This portfolio consists of insurance over 500 state and municipal debt issuers, and the weighted average maturity is 8.8 years as of the end of June of this year, they said.

This termination was also reported earlier by the Wall Street Journal.

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