2015: What would happen if Berkshire were deemed too big to fail?

BECKY QUICK: This question comes from Anthony Sterochi (PH) in Lincoln, Nebraska.

He says, “If government regulators deem Berkshire Hathaway’s reinsurance business too big to fail, how would government regulation of the reinsurance business affect Berkshire Hathaway?”

WARREN BUFFETT: Yeah. The question — there’s two, essentially, regulatory aspects to it.

One is there’s the European — and I hope I’m describing this right — I may be wrong, a little bit, on some technicality — there’s a European group that is looking at insurers, generally, and has designated, I believe, nine or so insurance companies as — I’m not sure what they call them — but they deserve special attention, I’ll put it that way. There’s a technical name for it.

The one that’s more relevant in the United States is the Financial Stability Oversight Committee, I believe they call it, which designates so-called SIFIs, systemically important financial institutions.

And large banks are in that category. And then the question is, what non-banks are in it?

And they designated General Electric, and Prudential, and recently, Metropolitan, and Metropolitan is fighting the designation.

The question is whether — question isn’t just whether you’re large. I mean, Exxon Mobil is large, Apple is large, Walmart’s large, and nobody thinks about them as SIFIs.

The definition on a non-bank SIFI would be 85 percent of revenues coming from financial matters, and we don’t come remotely close on that. I mean, we’re 20 percent or thereabouts.

But the real question is whether problems that Berkshire might encounter could destabilize the financial system in the country. And we have not been approached. Nobody’s ever called me.

They spent a year with Metropolitan, even before they designated them. So there’s — we have no reason, in logic, or in terms of what we’ve heard, to think that Berkshire would be designated as a SIFI.

I mean, during the last time of trouble, we were about the only party that was supplying help to the financial system, and we will always conduct ourselves in a way where the problems of others can’t hurt us in any significant way.

And I think we’re almost unique, among financial institutions, in the layers of safety that we’ve built into our system, in terms of both cash, and operating methods, and everything else. So, it’s a moot question.

It — the law exists. We haven’t been approached about it as we — as I know — as I mentioned.

Apparently it takes a year or so, even if they approach you while they listen to your presentation and look at your facts. And I do not think Berkshire Hathaway comes within miles of qualifying as a SIFI.

Charlie?

CHARLIE MUNGER: I think that’s true. But I think that, generally speaking, there is still too much risk in a lot of high finance. And the idea that Dodd-Frank has removed it all permanently is nonsense. And people like hanging onto it.

You know, trading derivatives, as a principle, if you’re shrewd, is a lot like running a bucket shop in the ’20s or a gambling parlor in the current era. And you have a gambling parlor that you have a proprietary edge in, and you say it’s sharing risk, and helping the economy, and so forth. That’s mostly nonsense.

The people are doing it because they like making money with their gambling parlor, and they like favorable labels instead of unfavorable labels.

So, I think there’s still danger in the financial system. And I also think our competitors don’t like it that they deserve regulation and we don’t. And I think there’s danger in that too.

WARREN BUFFETT: Yeah. One thing that may not be — (Applause)

I haven’t read much about it, but my understanding is that Dodd-Frank actually weakens the power of the Fed, and to some extent the Treasury, too, to take the kind of actions they took in 2008, primarily.

And those powers were needed to keep our system, in my view, from really going into utter chaos.

The ability to say, and have people believe you when you say it, that whatever needs to be done, will be done, has resided in the Federal Reserve and with the Central Bank — the European Central Bank.

And the fact that people believed when Hank Paulson said that the money market funds are going to be guaranteed, that stopped a run on 3 1/2 trillion of money market funds that had lost 175 billion in deposits in the first three days, there, back in September of one week.

If that — if people hadn’t believed that, you would have seen that 175 billion turn into a trillion very quickly. I mean, the system would have gone down.

So the — when you have a panic, you have to have someone, somewhere, who can say and be believed, and be correctly believed, that he or she will do whatever it takes.

And you saw what happened in Europe when Draghi finally said that, and you saw what happened in the United States when Bernanke and Paulson, more or less together, said it.

And if you don’t have that, panics — they will accelerate like you cannot believe.

You know, in the old days, the only way you could stop a run on a bank was, basically, for somebody to come and pile up gold. I mean, they used to race it to the branches that were having a problem. I remember reading the history of the Bank of America on that, and how they would put out runs before the Federal Reserve existed, and the only thing that stopped it was to pile up gold.

I mean, if the CEO of the bank came out and said, you know, our Basel II ratio is 11.4 percent, the line would just lengthen. It would not get the job done.

Gold got the job done. Bernanke and Paulson got the job done, but the only way they got it done was saying, “We’re guaranteeing new commercial paper. We’re guaranteeing that the money market funds won’t break the bank. You know, we’re going to do whatever’s necessary.”

I think Dodd-Frank weakens that, and I think that’s a terrible thing to weaken. (Applause)