Warren Buffett’s Berkshire Hathaway Inc. is well known as a tapestry of modern capitalism for its ownership of dozens of companies and investments in dozens more.
Now that interconnected web is prompting U.S. regulators to examine whether Berkshire’s stake in one of its biggest holdings, Wells Fargo & Co., violates rules for how much credit banks can extend to corporate insiders, according to two people familiar with the review.
Wells Fargo provides financing to many in Berkshire’s sea of subsidiaries. The relationships have triggered questions from agencies including the Federal Reserve into whether legal limits are being exceeded for how much a bank can lend to entities controlled by someone who owns a big chunk of its stock.
An arrangement raising particular concern is Berkshire’s 16 percent investment in American Express Co., which does substantial business with Wells Fargo, said the people, who requested anonymity because the examination isn’t public.
Regulation O
Spokesman for the Fed and Wells Fargo’s main banking regulator, the Office of the Comptroller of the Currency, declined to comment. Buffett didn’t respond to a request for comment sent to an assistant.
Wells Fargo values Berkshire “as a long-term shareholder and customer, and we appreciate the confidence that Berkshire’s executive team has shown” in the bank, company spokesman Mark Folk said in an e-mailed statement. He declined to comment on the regulatory review.
Buffett, 85, and his company disclosed in March that it reached a 10 percent threshold in Wells Fargo stock. That triggered a series of regulatory hurdles — including one known as Regulation O that restricts how much credit can be obtained by a major shareholder.
Regulation O is meant to address concerns that when banks fail, it’s often made worse by high levels of insider activity, according to a handbook for lenders and examiners that was written by the OCC. So, the government insists that banks separate “legitimate insider financial relationships from those that are, or could, become abusive,” the handbook says.
Passive Investor
Berkshire has asked the Fed for approval to maintain and even increase its 10 percent stake in Wells Fargo, saying in a June application that it may seek to “purchase additional shares.” If the Fed denies the request, Berkshire might have to dial back the holding of about $24 billion that Buffett described in a recent shareholder meeting as “our largest marketable security.”
The Berkshire application on its Wells Fargo stake faces a 60-day review period under the regulations, though the Fed can extend that.
Omaha, Nebraska-based Berkshire probably wouldn’t have to sell anything if it can persuade regulators that its stake in AmEx doesn’t mean it exerts any control over the credit-card company. Berkshire has successfully made the argument in the past to banking agencies.
Berkshire’s web of financial relationships ranges from its ownership of dozens of insurance subsidiaries to big investments in Goldman Sachs Group Inc. and U.S. Bancorp.
Still, regulators haven’t designated it as being key to the stability of the financial system. After the 2008 financial crisis, the government slapped such risk labels on insurance giants including American International Group Inc. and Prudential Financial Inc., which subjects the companies to tougher oversight and will likely bring higher capital demands. But regulators never moved past initial discussions of whether Berkshire should get the same treatment.
Though Buffett has had a stake in Wells Fargo for more than two decades, the San Francisco-based lender’s relationship with AmEx dates back to the 19th century. In recent years, the two companies have joined forces to launch combined credit cards.
As for Berkshire’s stake in AmEx, the payments company has had a longstanding commitment from Buffett to remain a passive investor, voting along with AmEx’s board recommendations. Beyond pointing that out, Marina Norville, an AmEx spokeswoman, declined to comment.
–With assistance from Noah Buhayar.