Buffett Makes Bond Insurers An Offer They Might Refuse

Berkshire Hathaway Chairman Warren Buffett last week offered three troubled bond insurers a deal to guarantee their municipal business, but not their shakier business related to securitization of subprime mortgage loans.

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 support for the bond insurers.

Mr. Buffett, who at the urging of Mr. Dinallo recently formed a municipal bond insurer, said he made a firm offer to Ambac Financial Group Inc., MBIA Inc. and Financial Guaranty Insurance Company to reinsure $800 billion in tax-exempt municipal 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 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. Buffett made his remarks two days before a congressional hearing on bond insurance was held last week, during which Mr. Dinallo offered testimony regarding the Berkshire proposal.

Mr. Buffett 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 and other poorly performing credit areas that have led to losses and have seen the insurers put on watch or downgraded by rating agencies.

Any downgrade could jeopardize the ability of state and local governments to issue bonds to help finance major infrastructure projects.

Mr. Buffett 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."

Mr. Dinallo, who Mr. Buffett said he had notified about his offer, said he is "pleased this provides another option to protect municipal bond issuers 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 issued by 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.