Buffett Try’s To Rescue Wall Street….Really!!

Warren E. Buffett offered to help three insurance companies whose plunging fortunes have become a threat to the financial system.

The companies are MBIA, the Ambac Financial Group and the Financial Guaranty Insurance Company. The three companies are struggling to maintain their AAA ratings after writedowns on the value of mortgage guarantees.

Mr. Buffett said he would stand behind, or reinsure, policies that the three companies had written on $800 billion of municipal bonds.

For years, bond insurers mainly provided credit-enhancement for municipalities in exchange for an upfront fee. A bond insurer would take a bond with a midling investment grade rating – like single-A, -- and offer to pay investors what they were due (interest and principal payments), if the issuer defaulted. These insurers had sufficient assets and expertise to garner triple-A ratings, so the issuers could pay less interest on their bonds than they would have without the backing.

Few bond issuers have gotten greedy in recent years, by insuring subprime-linked securities. Those bad bets now threaten their credit ratings and their future. The downgrade of a bond insurer would force some insurers to sell any municipal debt that didn't have an underlying AAA rating.

Speaking on CNBC, Buffett said his holding company, Berkshire Hathaway, is willing to commit $5 billion 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. The deal, he added, 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.

The bond insurers that lend their AAA rating to municipal debt, If reinsured by AAA rated Berkshire, the municipalities would also retain the top rating.

The insurers were considered unlikely to agree to Mr. Buffett’s stringent terms. Ambac, in a statement, said the offer would not benefit the company.
Mr. Dinallo, who regulates MBIA and F.G.I.C., has asked large banks like Citigroup, Merrill Lynch and UBS, many of which hold insurance policies from the guarantors, to devise a plan to shore up the insurers. The officials are discussing investing in the insurers or providing them with lines of credit to cover future losses and restore confidence in them. (Ambac is regulated by Wisconsin regulators.)

My Views

Take a closer look and you will see that the billionaire investor is prepared to provide an extra safety net only for insurance policies covering municipal bonds — debt issued by cities, sewer authorities and the like, which rarely default anyway. His offer doesn’t extend to collateralized debt obligations and other risky securities linked to subprime mortgages whose value has plunged in recent months.

Buffett is effectively offering the companies to give up future profits, insurers make on their traditional business in order to free up capital to deal with the situation. — “It does not make sense to give up what is the good part of your business.”

Buffett is trying to be opportunistic — Buffett is using his higher credit rating to extract value for his shareholders — it seemed a better deal for Berkshire Hathaway than for the troubled firms that might need his help.

This offer may force banks to come to the table as fast as possible and probably do it on better terms than, what Mr. Buffett is offering.