Why is Berkshire Hathaway is not on the “Too Big To Fail” list?

It appears that the Bank of England sent a letter to the U. S. Treasury asking why Berkshire Hathaway is not on the list of “too big to fail” institutions.

If you are on the list it is deemed that you are a financial institutions “whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity.”

MetLife, along with a number of other primary insurers, has sued the U.S. government about it’s designation as an SIFI (‘Systemically Important Financial Institution.”)  Being designated an SIFI brings along with it considerably more regulation.

New regulations under the Dodd-Frank legislation, mandate that financial institutions that fit SIFI qualifications, will have to meet higher capital standards and develop contingency plans for potential future failures.

But here’s something that most people are not aware of: insurance companies often take out insurance against catastrophic losses from other insurance companies.  The companies that insure the insurance companies are called “reinsurers.”  Berkshire Hathaway, run by Warren Buffett, is the largest of these reinsurers in the U.S. and the third largest in the world.

So who is more important to the financial stability of the financial system, retail insurance companies or the big global reinsurance companies that insure the insurers?  To me, the answer seems obvious.

To use your local bank as an example.  If it goes broke (and many have) it’s no big deal because your money is insured by the FDIC (Federal Deposit Insurance Corporation).  But if the FDIC went broke, that would be a BIG DEAL.  Then no one’s bank deposits would be safe.

Insurance is Berkshire’s most significant business – accounting for 27% of net earnings last year – and providing Warren Buffett with the capital to invest in stocks and acquisitions.  But Warren Buffett has friends in high places which may explain the reason he’s not on “the list.”

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