Warren Buffett’s Monoline Gambit
Print This Story
February 13th, 2008 by AdvisorAnalyst
Twitter It! | Email This Article
Feb. 13, 2008 - Warren Buffett, live on CNBC, proposed to buy the muni-bond portfolio from the monoline insurers, an offer, which if accepted would be very good for muni-bond holders (as it would protect the bond’s AAA ratings and their pricing) and Berkshire Hathaway, and would effectively leave the CDO portfolios right where they are. This could in no way be misconstrued as a bailout. This is Warren Buffett doing what he does best. Ahhhh…Capitalism at its finest.
Here is the excerpt of the transcript from CNBC.
Becky Quick: We know Warren that you’ve already put a plan out where you are, in fact, a bond insurer yourself. You have a new company that’s doing that. But beyond that, Ambac, FGIC and MBIA, they all have some significant problems. What do you think needs to be done?
Warren Buffett: Well, last Wednesday, as you know we have formed a new bond insurer. And last Wednesday, Berkshire Hathaway made a firm offer to the three largest bond insurers, who in aggregate I think, insure about 800 billion (dollars) of tax exempt bonds.
And what we said we would do is, and we gave a copy of this, of course, to the Superintendent of Insurance of New York. We said we would form, we would add to our company’s resources five billion dollars. That five billion dollars in the new insurance company, we would pledge that there would be no dividends or any kind of distributions or management fees taken out of that for ten years, so all the earnings of that company would be retained to build up the claims-paying ability.
And we offered to take over the liabilities for the whole $800 billion of these three companies for a premium that would be equal to, essentially, one-and-a-half times the remaining premium left over the life of the bonds. They have what they call an ‘unearned premium reserve’ which reflects the original premium less the amount that’s been proportionately earned. And we said, for one-and-a-half times that amount, we would take away all of their liabilities so that the $800 billion in bonds would carry a 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.
And we provided additionally that if they felt that this premium was too high or that they could do better that for thirty days, they would have the backstop of our offer which would be totally firm, and if they came up with anything better for themselves and for the holders of their insured bonds, that for a break-up fee of one-and-a-half percent of the premium, that they could go and take the other deal. So that the world would know that, one way or the other, that that the municipal bond insurance problem was behind it. It would be either with our offer or some other offer that they went out and obtained.
So, we put that out there to the three largest insurers and if they should decide to take it, eight-hundred billion of bonds that are now selling as if they were uninsured, or even in some cases a little worse. They’re probably selling on balance maybe 5 percent below where would sell for if the insurance was regarded as good, which is 40 billion on 800 billion. We will see what happens.
Good Luck Mr. Buffett, and good luck muni-bond holders…
Read more from the author/contributor here.
Related Posts
How Solid are the BRICs? (Part 2)
Asset Class and Stock Performance During the Current Easing Cycle
Tags: ABK, Banks, Barry Ritholtz, Blackrock, Blog, CDS, Credit, Credit Default Swap, Credit Market, Currency, dig, Dislocations, Doug Kass, Economy, Facet, Financial Engineers, Financial Sector, Financials, Fixed Income, Friend Doug, Investment, Investment Banks, Junk Bonds, MBI, Morgan Stanley, Municipalities, Party Risk, Point In Time, REW, risk, Risk Business, Small Concern, Steady Revenue Stream, Vig, Warren BuffettPosted in Bonds, Markets |
