NU Online News Service
Berkshire Hathaway Chairman Warren Buffett said today he had offered three troubled bond insurers a deal to guarantee their municipal business, but not their shakier investments.
Still, his comments, which came in an interview on CNBC, set off a stock market rally and drew a happy reaction from New York Insurance Superintendent Eric Dinallo, who has been working on deals to provide financial supports for the bond insurers.
Mr. Buffett, who at the urging of Mr. Dinallo recently formed a municipal bond insurer, said he made to firm offer to Ambac Financial Group Inc., MBIA Inc. and Financial Guaranty Insurance Co., (FGIC) to reinsure $800 billion in tax-exempt bonds.
The billionaire investor from Omaha, Neb., said the premium involved "would be equal to, essentially, one-and-a-half-times the remaining premium left over the life of the bonds."
He explained that his offer would mean the bonds would now "carry a real 'Triple-A' insurance, and would sell in the market as if it had real 'Triple-A' insurance. Whereas now the bonds sell at significant discounts."
Mr. Buffet said the insurers he had named were not exactly leaping at his offer, and that one had turned him down flat. Ambac said it had rejected the proposal.
His offer would not cover the collateralized debt obligations (CDOs) and other poorly performing credit areas that have led to losses and have seen the insurers put on watch or downgraded by rating agencies.
Mr. Buffet conceded that his offer "doesn't do anything for the CDOs…but I'm not sure anything is going to do much for the CDOs. We'll just have to find out how that plays out."
He said his offer to support the municipal business would put them "at the front of the line" with bond insurers in difficulties, where currently they would be at the back "because the funds will get depleted for all of these other types of insurance before they get to the municipals in very large part."
Mr. Dinallo, who Mr. Buffett said he had notified about his offer, said he is "pleased this provides another option to protect municipal bond issurers and investors."
Mr. Buffett remarked that state insurance departments, "particularly" Mr. Dinallo's, have been "very cooperative and put forth a lot of energy into trying to find a solution for this. They want to find a solution for the municipal bond insurers."
The Berkshire Hathaway chairman said guarantees of bond insurers are so worthless now that "we've actually bought, or, we see bonds trading that are insured, that are selling at lower prices than their uninsured counterparts, just because there's been an unusual supply and demand situation."
"So the insurance in the market is presently not doing the bondholders a bit of good, and in fact in some cases it's even penalizing below the price of other bonds," he added.
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