Buffett Offers to Reinsure Municipal Bonds
NYT
By Vikas Bajaj
Published: February 12, 2008
Warren E. Buffett, the billionaire investor, said on Tuesday that he had offered to reinsure the municipal bond portfolios of three troubled bond guarantors but had been rebuffed by at least one of them.
Speaking on CNBC, Mr. Buffett said his new bond insurance firm, Berkshire Hathaway Assurance, was willing to reinsure as much as $800 billion in municipal bonds that have been insured by MBIA, the Ambac Financial Group and the Financial Guaranty Insurance Company.
Mr. Buffett’s offer helped drive stocks higher this morning. At 12:45 p.m. the Dow Jones industrial average was up more than 150 points, or 1.3 percent, and the Standard & Poor’s 500 stock index was up almost 1 percent. Shares of financial companies, which might benefit from having a strong firm like Berkshire backing municipal bonds, were up 1.8 percent.
But shares of the guarantors fell as investors considered the ramifications of Mr. Buffett’s statements on their business. The offer would do little to alleviate the problems the companies are facing on the guarantees they have made to investors who hold securities backed by mortgages, consumer loans and other assets. In fact, reinsuring municipal bonds with Mr. Buffett could make the guarantors more vulnerable because they would be left with the riskiest insurance contracts.
“Essentially, if any of the companies were to take him up on this offer it would be almost them waving a white flag saying that they are done,” said Rob Haines, an analyst at CreditSights, a research firm. “It does not make sense to give up what is the good part of your business.”
MBIA’s stock fell 9 percent, to $12.33. Shares of Ambac were down almost 10 percent, to $9.44.
In an interview in December, Mr. Buffett said he did not want to enter that business, because it was too complex and risky — a view he reiterated on CNBC Tuesday morning.
“The insurance in the market is not doing bondholders any good and is in some cases penalizing bond investors,” Mr. Buffett said. “Our proposal puts the municipals at the front of the line.”
In the last couple of months, investors and regulators have focused intensely on the bond guarantors, worrying that the companies’ failure could set off a chain of losses across the financial system. The New York insurance superintendent, Eric Dinallo, has asked large banks, many of which hold insurance policies from the guarantors, to come up with a plan to shore up the insurers.
Reinsurance — in which an insurance company cedes some of the premium and risk associated with their policies to another firm — has been seen as one possible solution discussed by the banks and Mr. Dinallo. The guarantors would prefer to reinsure the part of their business that is most at risk for future losses, not the generally safe municipal bonds that Mr. Buffett is offering to protect.
The officials are also discussing providing new capital or lines of credit to the guarantors to cover future losses and restore confidence in the firms.
In late December, Mr. Buffett created Berkshire Hathaway Assurance to compete directly with MBIA, Ambac and F.G.I.C. State insurance regulators granted the firm speedy approval, because of worries that cities, counties and states could face higher borrowing costs if the existing bond guarantors lose their triple-A credit ratings.
Source: NYT
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