Tuesday, February 12, 2008

Buffet's Offer to Bond Insurers

CNBC is reporting that Berkshire Hathaway's new bond insurer is offering to reinsure municipal bonds for the existing bond insurers. There are no details available yet about the deal, but this seems a better deal for the investors in insured munis than the bond insurers. MBIA and the other bond insurers are in trouble because of CDOs they insured that are turning out to be basically worthless. Their muni bond business has always been solid. A muni bond insured by MBIA is now trading as if the insurance didn't exist (who really thinks MBIA could pay off in the case of a default?) so existing owners of those bonds would certainly benefit. How the bond insurers themselves would benefit is a little more murky. I'll post more details when they become available.

You really have to give Buffet credit on this. He's a hell of a businessman. He set up this company after the bond insurers got in trouble and if they fail, he will get all future business in the muni bond insurance business. By making this reinsurance offer he is attempting to get some of the existing business as well. Investors will push the bond insurers to accept but if I were them, I'd pass. Why give away their good business? If they accept, they will have written their own death sentence.

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