Buffett offers to back municipal bonds

http://news.yahoo.com/s/ap/20080212/ap_on_bi_ge/buffett_muni_bonds

Buffett offers to back municipal bonds
By JOSH FUNK, AP Business Writer
2-12-08

Billionaire investor Warren Buffett said Tuesday that he has offered to help out troubled bond insurers by offering a second level of insurance on up to $800 billion in municipal bonds.

In an interview on CNBC, Buffett said his Berkshire Hathaway holding company made the offer of reinsurance to bond insurers Ambac Financial Group Inc., MBIA Inc. and Financial Guaranty Insurance Co. Buffett said one firm rejected his offer, and he was still waiting to hear from the other two. He did not say which was which.

Many have speculated Buffett could step in and help out the troubled industry, though he made clear his offer was not altruistic.

"When I go to St. Peter I will not present this as some act that will entitle me to get in," Buffett said on CNBC. "We're doing this to make money."

Berkshire spokeswoman Jackie Wilson said Buffett was traveling Tuesday, and no one was immediately available to comment.

Earlier this month, Buffett said Berkshire would not invest in any of the bond insurers, but his company would consider insuring some of the risks the bond insurers had assumed.

Bond insurers write policies that promise to cover payments to bondholders if the entity that issued the bonds defaults.

Buffett said on CNBC that he estimated that $800 billion of reinsurance would cover all of the tax exempt municipal bonds that Ambac, MBIA and Financial Guaranty insure.

Reinsurance policies offer coverage to insurance companies that want to completely or partly insure the risk they have assumed for their customers.

Buffett said Berkshire offered to reinsure the municipal bonds in exchange for a fee equal to 1.5 times the remaining unearned premium over the life of the bonds.

Buffett said on CNBC that such a deal would ensure that the bonds would sell at a fair price. Currently, he said, the bonds sell at significant discounts because of concerns about the financial health of the bond insurers.

In recent months, bond insurers have come under fire from ratings agencies, which are worried the insurers do not have enough spare cash to cover a potential spike in claims.

Bond insurers originally offered insurance mainly to municipalities but in recent years expanded their operations to insure more profitable but riskier instruments.

That riskier debt includes bonds backed by pools of mortgages — mainly subprime loans given to customers with poor credit history. As those mortgages have increasing defaulted, ratings agencies fear the bonds supported by the troubled loans will default as well.

A spike in defaults in the coming months could force the insurers to pay billions of dollars in claims.

Buffett said he's seen insured bonds selling at lower prices than uninsured bonds

"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 the price below that of other bonds," Buffett said on CNBC.

Late last year, Berkshire launched its own bond insurance business to take advantage of the credit problems other bond insurers have been having.

Berkshire's new bond insuring division has a "AAA" credit rating. Buffett has said Berkshire's new company already has done a couple of deals insuring municipal bonds.

Some bond insurers, such as Ambac and FGIC, have been downgraded by ratings agencies in the past month as they have been unable or chosen not to raise capital to ensure their vital "AAA" financial strength rating.

Bond insurers essentially need "AAA" ratings to book new business.

Buffett's reinsurance offer would only back municipal bonds, he said, and not other risky and complicated financial instruments.

Berkshire owns insurance, furniture, jewelry and candy companies, restaurants, natural gas and corporate jet firms and has major investments in such companies as The Coca-Cola Co. and Wells Fargo & Co.
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AP Business Writer Stephen Bernard in New York contributed to this report.
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On the Net:

Berkshire Hathaway Inc.: http://www.berkshirehathaway.com/

Transcript of CNBC interview: http://www.cnbc.com/id/23126179

Ambac Financial Group Inc.: http://www.ambac.com/

MBIA Inc.: http://www.mbia.com/

Financial Guaranty Insurance Co.: http://www.fgic.com/