February 13, 2008


Behind Buffett's Bond Gambit: The Berkshire Hathaway chief's offer to reinsure $800 billion in munis may signal a move to dominate the bond insurance biz (David Bogoslaw, 2/12/08, Business Week)

The role of the white knight who swoops in to rescue a business in distress is one that Warren Buffett plays well, and he's profited nicely from it in the past. Remember his bailout of Salomon Brothers in the early 1990s? But the financial guaranty outfits whose municipal-bond liabilities the billionaire investor offered to take over last week may not wish to take part in Buffett's latest performance.

In an interview on CNBC Business News on Feb. 12, Buffett said that in the prior week his company Berkshire Hathaway (BRKA) had offered to reinsure about $800 billion worth of tax-exempt municipal bonds insured by three leading financial guaranty firms, which would allow them to preserve their coveted triple-A ratings. He would also put $5 billion of capital into his new bond insurance company, Berkshire Hathaway Assurance, to provide it with the wherewithal to cover the assumed liabilities. [...]

Buffett has made it very clear that there's nothing altruistic about his offer. He stands to make a lot of money by assuming these policies, given that the cities and towns that issue munis hardly ever default on their debt. When they do, the recovery rate is more than 90%, compared with a 50% recovery rate in corporate debt defaults, says Tilson.

...you only have to be as smart as a Chinese textile worker. Nothing is as secure as American debt.

Posted by Orrin Judd at February 13, 2008 8:34 AM

Why do I picture a guy in a wheel chair talking across a desk with Jimmy Stewart?

Posted by: The Other Brother at February 13, 2008 10:45 AM

"You sit around here and you spin your little webs and you think the whole world revolves around you and your money. Well, it doesn't, Mr. Potter! In the . . . in the whole vast configuration of things, I'd say you were nothing but a scurvy little spider!"

Yeah, I'd say that sums up Buffet pretty well.

Posted by: Bryan at February 13, 2008 11:24 AM

Well sure, Buffet ain't in it to lose money.

Posted by: pchuck at February 13, 2008 11:43 AM

As Buffett has observed before, there's no investment like buying money at a discount. In this case he's doing us all a service by cooling the panic, though.

Posted by: Mike Earl at February 13, 2008 11:59 AM

Potter was the hero of that movie, not that suicidal twit.

Posted by: Jim in Chicago at February 13, 2008 12:39 PM

He has unfortunate political views, but everyone would benefit from reading a collection of his letters to Berkshire Hathaway investors. Full of solid common sense, wisdom and humourous deprecation of idiot trends and BS in the financial world.

Posted by: Ali Choudhury at February 14, 2008 10:06 AM