NEW YORK--Warren Buffet's entrance into the bond insurance sector may have distressed some domestic New York bond insurers, but the benefits to the overall marketplace outweigh the drawbacks, New York's top insurance regulator said.

Insurance Superintendent Eric Dinallo made his comments Saturday at the National Conference of Insurance Legislators meeting here.

Mr. Dinallo was asked during a Q&A session if allowing Berkshire's startup company "to cherry pick the good business" caused further problems for the existing struggling bond insurers.

Mr. Dinallo answered, "Yes, it did." He added, "I was certain that we were going to put some distress on the existing bond insurers" but he also said, "I felt that the market desperately needed capacity."

In speaking about the department's response to bond insurance problems, Mr. Dinallo cited recruiting Mr. Buffet into the marketplace as a part of the department's plan to bring in new players and new capital.

Mr. Dinallo said that he had called Mr. Buffet and asked him if he would be interested in creating a triple-A rated bond insurer in New York. He said he told him that he could get Mr. Buffet a license quickly if he agreed to enter the marketplace.

Mr. Dinallo said that rating agencies had indicated to him that the marketplace needed between $10 billion to $15 billion in additional capacity at that time.

He noted that the global stock market had taken a hit because of the bond insurance market, and though he said that Mr. Buffet's entrance may not have been particularly beneficial to some individual bond insurers, it was beneficial to the market as a whole.

Mr. Buffet's entrance, Mr. Dinallo said, helped stabilize the marketplace. "So that was a choice we made."

He also noted that Mr. Buffet is a "market maker," and part of the rationale in bringing such a player into the sector was that if Mr. Buffet went in, others would follow.

In addition to getting someone such as Mr. Buffet into the market, Mr. Dinallo pointed to the department's efforts to facilitate capital injections into existing bond insurers.

The department will also work to establish "new rules of the road" through statute and regulation, Mr. Dinallo said.

New York, he promised, will be a leader in creating a roadmap that will ensure that the problems currently facing the market do not happen again. He mentioned transparency, and some prohibitions regarding what bond insurers can insure as two initiatives being looked at.

Regarding some factors that led to the bond insurance market crisis, Mr. Dinallo said that rating agencies were partially responsible. "They rated a lot of the structured stuff triple-A...and then the bond insurers sort of put belts and suspenders on that triple-A [rating]."

He said that rating agencies based the ratings on statistical analyses on how often people defaulted on their homeownership and mortgages. But he noted that, ultimately, the rating agencies put triple-A ratings "around a lot of stuff that ended up being very far away from triple-A."

But the bond insurers themselves also must be held accountable, Mr. Dinallo said. He explained that they should have done some due diligence and questioned the rating agencies' decisions.

"After all," he said, "they are insurance companies, and they underwrite, and they probably didn't dig in deep enough and do their own due diligence...."

Special Reports /

Dinallo: Buffet's Bond Market Entry Outweighs Drawbacks

Related Stories

Recommended For You