Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) may have essentially maxed out its stake in Wells Fargo & Co (NYSE:WFC) and, depending on what regulators say, BRK.B might even have to dial it back.
WFC has long been one of Buffett’s most beloved stocks, so much so that Berkshire now owns more than 10% of the bank. But by breaking that threshold, Berkshire may have triggered a Regulation O, which limits how much credit banks may extend to corporate insiders.
Berkshire’s sprawling portfolio means it holds shares in companies or owns subsidiaries that do business with WFC. The most glaring example is Berkshire’s 16% in American Express Inc. (NYSE:AXP), Bloomberg reports. The bank and the financial services firm have extensive business with each other. Berkshire’s stakes of more than 10% in both companies make it a corporate insider for regulatory purposes.
Regulation O is meant to put a ceiling on insider activity in the event of a bank failure. Excessive insider activity only exacerbates the crisis.
BRK.B Asks for Special Treatment
And so regulators are looking into whether Warren Buffett’s holding company may have crossed a line.
In June, Berkshire Hathaway applied to the Federal Reserve for the equivalent of an exemption. Regulators have 60 days to review the application. If the Fed gives the thumbs down, Berkshire might have to sell some of its stake.
None of this changes the investment thesis on BRK.B or WFC stock, of course. According to S&P Capital IQ, Warren Buffett’s company owns 10.03% of the bank. It won’t be required to have a fire sale in order to get back under the regulatory threshold.
But it’s likely at least somewhat frustrating for Berkshire. Warren Buffett really loves adding to this stake. Indeed, at $24 billion, WFC is BRK.B’s largest marketable security.
If regulators deny Berkshire Hathaway’s application, it looks like Warren Buffett will have to find a new most favorite stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
