Berkshire Hathaway: Under the Microscope

Is Berkshire Hathaway going to end up going the way of some of the other large non-bank financial companies?

When your company is one of the most respected in the world, there’s no question that you’re going to draw more attention than other businesses. But Berkshire Hathaway doesn’t have to worry about being scrutinized for its returns. The truth is that regulators are trying to determine if the business is considered a systematically important financial institution.

SIFI Network

Ever since the global economic financial crisis nearly destroyed the economy, oversight is being expanded by regulators. In the latest push, they are attempting to identify SIFIs, otherwise known as systematically important financial institutions, and determining if the Federal Reserve has the right to oversee these businesses.

The Financial Stability Oversight Council has the privilege of doing this job. They are a domestic group, and they have already chosen a few companies to enter the SIFI ranks. Among the new additions are Prudential Financial, General Electric’s financial arm and American International Group. They’ve also added MetLife to the list and the business is the final review by the Council.

Does Berkshire Hathaway Fit?

The company’s insurance operations will determine their systemic importance. In truth, Berkshire Hathaway owns and operates two of the biggest reinsurers across the globe, including Berkshire Hathaway Reinsurance Group and General Re. Essentially, a reinsurer grants insurance to other insurance companies. This is a way for these businesses to manage risk.

In order to be determined a SIFI, a business has to meet a number of criteria designated by the FSOC, and so it’s quite possible that the review will end up with Berkshire Hathaway not being labeled a systematically important financial institution.

Berkshire Hathaway’s largest acquisitions may end up being the reason they keep the SIFI designation at bay, and save the company’s hide. Even though this business has over $300 billion in assets attributed to “insurance and other,” the company’s acquisitions of industrial businesses, media and consumer operations actually eliminate the first half of the final criteria.

These revenue streams may have also diluted the company’s annual revenues. They need to stay below the FSOCs 85% threshold, which is the second condition. Berkshire Hathaway has yet to report their full-year results for 2013, but analysts have estimated that Berkshire Hathaway’s revenue related to insurance could end up above the 25% mark, but this is only conjecture that was posted at The Wall Street Journal.

Why Designate Berkshire Hathaway a SIFI?

Ultimately, with the additional title Berkshire Hathaway would be subjected to further oversight by the Federal Reserve, but we do not know exactly what this title entails. The Feds have not provided a great deal of information and they haven’t shared what they will require all of the SIFI designated firms. The likely oversight candidates will include additional scrutiny for capital plans, plus further restrictions about what companies are allowed to do with their capital.

This can certainly be a big deal for other companies. MetLife is trying to fight the potential oversight by the Fed, saying that they will end up being forced to stop doing business in certain areas because of the restrictions. For Berkshire Hathaway, there may be minimal results. The company doesn’t have any serious debt, but it does have a tremendous amount of capital. For management, the designation as a SIFI may end up being a minor inconvenience and nothing more.

Influences from the Outside

Other than the FSOC, there is the Financial Stability Board. They are an international group of regulators, and they are considering the systematic importance of other non-bank financial companies. For the most part, this board is trying to determine whether reinsurance providers should have the designation as globally systemic financial institution, and this is the decision that we will likely learn in the summer of 2014.

Berkshire Hathaway happens to operate the two largest reinsurers across the world and a number of others as well. Investors need to pay attention to the FSB’s decision. As previously stated, this designation and the oversight requirements could end up having little impact on the company.

Keeping Track of It All

It’s important that investors know what is going on with their companies, and this is especially true when regulators are involved. But the designation should not be a make or break decision for your portfolio. Always follow Buffett’s prescription for good investing: Invest for the long term in a strong company that has staying power.