Warren Buffett's Enormous Brainchild Goes Under the Microscope

Source: Insider Monkey.

When you're one of the most respected companies in the nation, you're sure to get more attention than others. But Berkshire Hathaway (NYSE: BRK-B  )   (NYSE: BRK-A  ) isn't being scrutinized for its returns -- regulators are determining the company's fate as a systemically important financial institution.

The SIFI network
Ever since the financial crisis nearly toppled the global economy, regulators have been expanding their oversight. The latest push has been to identify SIFIs, or systemically important financial institutions, and establish the right for oversight from the Federal Reserve.

Tasked with this hefty job is the Financial Stability Oversight Council, a domestic group that has already named a few companies to the SIFI ranks: American International Group (NYSE: AIG  ) , Prudential Financial (NYSE: PRU  ) , and General Electric's financial arm. Also on the FSOC's list is MetLife (NYSE: MET  ) , which is in the final stages of the council's review.

Fitting in
The question of Berkshire Hathaway's systemic importance hinges on the company's insurance operations. Buffett's conglomerate operates two of the globe's largest reinsurers -- General Re and Berkshire Hathaway Reinsurance Group. A reinsurer essentially provides insurance to other insurance companies to help manage risk.

The FSOC has a number of criteria for its designation of a SIFI, so there is a chance that the review will ultimately end without a SIFI label for Berkshire Hathaway:

Is Berkshire Too Big to Fail? | Data from the WSJ

Buffett's big elephants may save the company's hide -- the large acquisitions that Berkshire Hathaway goes after may be the saving grace keeping the SIFI designation at bay. Though the company has an astounding $301.7 billion in assets attributed to "insurance and other," Berkshire Hathaway's acquisitions of other consumer, media, and industrial companies eliminated the first half of the final criteria.

The acquired revenue streams may also have diluted its annual revenues enough to stay below the FSOC's 85% threshold for the second condition. Since Berkshire Hathaway has yet to report its full-year 2013 results, the results of the FSOC's review is only conjecture, but analysts estimate that the insurance-related annual revenues could tally just above the 25% mark, according to The Wall Street Journal.

Photo: Flickr/DonkeyHotey.

Systemically important designation?
The SIFI title may carry with it the added oversight of the Federal Reserve, but what the title encompasses isn't clear. So far, there hasn't been a great deal of information on what the Fed will require from the SIFI firms. Added scrutiny of capital plans and restrictions on what the companies can do with their capital are likely candidates for inclusion in the oversight.

For other companies, that may be a big deal: MetLife is currently the only company fighting the potential Fed oversight, stating that any proposed capital restrictions would cause it to exit various lines of business. But for Berkshire Hathaway, the result may be minimal. The company has very little debt and a great deal of capital, so the SIFI designation could be little more than an inconvenience for the management.

Outside influences
Besides the FSOC, the Financial Stability Board, an international group of regulators, is considering the systemic importance of other non-bank financial companies. Namely, the board is currently deliberating on whether reinsurers should be designated as globally systemic financial institutions -- a decision that will probably come this summer.

Since Berkshire Hathaway operates two of the largest reinsurers in the world, as well as invests in a number of others, investors should keep an ear out for the FSB's decision. But again, there may be little impact on the company based on what the new oversight requirements include.

Keeping track
Though investors need to know what's going on with their companies, especially when regulators are involved, the designation in question shouldn't be a make-or-break consideration for your portfolio. Be sure to follow the Buffett prescription for good investing: Find a solid company with staying power and invest for the long term.

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Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 28, 2014, at 1:13 PM, TXObjectivist75 wrote:

    Does anyone doubt that Obama's best buddy won't be a SIFI?

  • Report this Comment On January 28, 2014, at 6:43 PM, SanLouisKid wrote:

    It's interesting that in the meltdown, Berkshire was a company others went to for financial assistance. I understand the formula may force inclusion, but it just points out the fact many formulas end up being very generalized. The situations they address in the real world may be outside the scope of the formula.

  • Report this Comment On January 29, 2014, at 3:49 PM, SonyaWiley wrote:

    Dear Warren,

    I'm not a fan of the 'insidermonkey' I think it was created in bad faith, since racism is a mile beneath me, I'll look pass it right now to answer this very personal and important question?

    Bring on the microscope so I can out shine the rest.

  • Report this Comment On January 30, 2014, at 11:16 PM, Packers101 wrote:

    BRK is such a diverse company, really bundle of companies that, while most likely being too big to fail, is also into so many things that it might fit into this list for reasons unique to itself. And that alone may make including BRK in the SIFI list not necessarily...well...necessary. I also agree that if it were to ultimately be included, the result of that would simply be a minor inconvenience to BRK management.

    On a completely different note Jessica, I noticed on your profile that you're a Green Bay Packers fan, as well as a Boston Bruins fan. If you look at my photo, I'm the guy on the phone. I've been a member of the Packers field staff since 2000, and have a Super Bowl ring from SB XLV. And for kicks I also grew up a Bruins fan. Small world.

    Go Pack Go!

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