Dad, Someday Can I Grow Up to Be Too Big to Fail?
Now I understand what it means to reach the pinnacle of achievement as an American investor.
First, you start with a modest kitty, and over the course of several decades, you succeed so far beyond anyone’s wildest dreams that the government has to deem your enterprise a systemically important financial institution. Then, you’re officially too big to fail. And there aren’t many rungs on the ladder left to climb after that. So hand off the management to some young up-and-comers, who over time may benefit from the government halo or perhaps suffer from its smothering embrace.
This is where Berkshire Hathaway Inc. may well be headed. Yesterday, Bloomberg News reported that regulators at the U.S. Financial Stability Oversight Council have begun scrutinizing Berkshire to determine whether it is important enough to the financial system to warrant Federal Reserve supervision. It would be no surprise if the conclusion is that it does. And when you think about this for even a moment, it is a sad turn of events.
I don’t doubt that a meltdown at one of Berkshire’s reinsurance units, which include General Re Corp. and National Indemnity Co., might send world markets into a tizzy. Berkshire long has been the premier backstop of choice for huge financial institutions that get in trouble. It bought stakes in Goldman Sachs Group Inc. and Bank of America Corp. when they needed to restore investor confidence after the banking system almost fell apart. Years before American International Group Inc. imploded, Gen Re once even helped AIG cook its books.
Even if you idolize Berkshire and believe Warren Buffett is infallible, there’s no telling how Berkshire’s businesses will perform once he’s no longer at the helm. It makes sense, too, that the nation’s most favored rescuer of ailing megabanks itself would be deemed too big to fail. Under Fed supervision, an investment from Berkshire might become an even more powerful endorsement than it is already. The Fed conceivably could gain influence in deciding who gets one.
But this isn’t how capitalism and free markets are supposed to work. As Buffett wrote in a 2010 letter to shareholders: “Too-big-to-fail is not a fallback position at Berkshire.” It sure shouldn’t be.
Nobody told Buffett on his way up which securities, derivatives and business acquisitions were appropriate risks for Berkshire to take on, or how concentrated or diversified his company’s bets should be. Nor is it right that the government should deem Berkshire so vital to the financial system that it deserves special treatment.
Regulators and lawmakers can crow all they want about how the Dodd-Frank Act ended “too big to fail.” But there don’t seem to be many investors who believe that. Fannie Mae and Freddie Mac are still around as wards of the state. Congress has been known to change its mind in a panic, as it did in 2008 when it passed the law that created the Troubled Asset Relief Program. Plus, Dodd-Frank gave the government the option of placing insolvent, systemically important companies into a special resolution program and letting them avoid traditional bankruptcy proceedings.
If the government decides that Berkshire’s insurance operations are so critical that their failure might threaten the financial system, the proper thing to do would be to break them up. In other words, make them less important. The same goes for all of the other financial institutions that already have been deemed systemically important. But as everybody knows, that isn’t going to happen.
We decided as a nation years ago that we’re no longer willing to let the markets sort out such companies when they falter. Nobody wants to take the economic hit. So now an icon widely revered as an exemplar of U.S. corporate excellence one day may come to represent something we once prided ourselves on being against: protection rackets for the richest, most powerful corporations -- the very embodiment of crony capitalism.
Maybe someday we’ll tell our children: Kids, if you work hard enough, with a little bit of luck, someday you can build something that becomes too big to fail, too. We all should hope for something better.
(Jonathan Weil is a Bloomberg View columnist.)
To contact the writer of this column: Jonathan Weil in New York at firstname.lastname@example.org.
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