Warren Buffett's Enormous Brainchild Goes Under the Microscope

Will Buffett's conglomerate be going the way of other big non-bank financial companies?

Jan 28, 2014 at 7:20AM
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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.

Is Buffett "too wise to ignore?"
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Fool contributor Jessica Alling has no position in any stocks mentioned. The Motley Fool recommends and owns shares of AIG and Berkshire Hathaway and also has options on AIG. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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