Tuesday, February 12, 2008

Buffett Bids on Bond Insurance?

Bloomberg reported today: Buffett Bids for MBIA, Ambac Municipal Bonds
Billionaire investor Warren Buffett said he offered to shore up $800 billion of municipal bonds guaranteed by troubled MBIA Inc., Ambac Financial Group Inc. and FGIC Corp. in a bid to gain 33 percent of the debt insurance market.

Buffett's Omaha, Nebraska-based Berkshire Hathaway Inc. would assume the risk of the debt, he told CNBC television. The offer excludes the bond insurers' subprime-related obligations. One company has already rebuffed the proposal and the two others haven't responded, Buffett said.
...
Berkshire would put up $5 billion as capital for the plan and is offering to insure the municipal debt for 1.5 times the premium charged by the bond insurers to take on the guarantee. The insurers could accept the offer and back out within 30 days for a fee, Buffett said.

We know already that the structured product obligations of the bond insurers have and will continue to lead to large losses. Buffett's new proposal would mean that the bond insurers would have to accept losses on their municipal business as well. We can conclude that likely has two things in mind. One, Buffett is trying to take advantage of the bond insurer's liquidity problems to make a good investment. Second, Buffett thinks that they may have under-priced their municipal risk too. That would be real bad news for the bond insurers.

3 comments:

Anonymous said...
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Anonymous said...

This could have a significant effect on the number of people getting bonded, and the 1.5x premium charge is more than reasonable.

However, Buffet's ulterior motives might have to be looked at, as you say, because if the latter situation arises, it certainly will be bad news for the insurers.

Anonymous said...

Interesting to know.