Is Warren Buffett's Berkshire Too Big To Fail?


Is Warren Buffett's Berkshire Too Big To Fail?

At his annual meeting on Saturday, Warren Buffett predictably rejected the idea that Berkshire Hathaway Inc, a sprawling conglomerate he has built over 50 years, has grown so big that it is now too big to fail.

The implications of being too big to fail are whether it needs increased regulatory oversight, similar to other large, systemically important financial institutions.

"There is no reason, in logic or in terms of what we've heard, to think that Berkshire would be designated as a SIFI," Buffett said at Berkshire's annual meeting. SIFI is the acronym for systemically important financial institution. "I do not think Berkshire comes within miles of qualifying as a SIFI."

The SIFI designation means companies must be monitored by the Federal Reserve, which could make them adopt tighter capital and liquidity requirements that likely impede growth and profitability.

The scrutiny on Berkshire's size has grown over the years as the company has amassed more than 80 businesses, including capital-intensive businesses such as the Burlington Northern railroad, and units that insure against major catastrophes.

Those catastrophes are always costly, with both the September 11 attacks on the World Trade Center and Pentagon as well as Hurricane Katrina in 2005 costing the company billions of dollars.

To counter the risk of default, Buffett has pledged to maintain a $20 billion cash cushion at Berkshire which now sits at $63.7 billion.

While the cash cushion seems reassuring other big insurance operations that compete directly with Berkshire already have the SIFI moniker including American International Group Inc, MetLife Inc and Prudential Financial Inc.

The designations also raise fresh questions about crony capitalism. Is Warren Buffett too well politically connected so as to be beyond reproach? Its a theory many have thrown around, given his tight communication with the Federal Reserve as well as all of the nation's senior politicians. When Warren calls, you pick up the phone. This surely has some influence over the decision whether to designate his company or its subsidiaries despite the seemingly straightforward explanation.

After all, this is the man who hold billions of dollars in instruments he deemed "weapons of financial mass destruction". While he says one thing he may do the next so perhaps Washington to give a little more scrutiny to Uncle Warren and his sprawling empire.

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