Tuesday, February 12, 2008

Buffett calls bond insurers' bluff, short sellers say (BRK.A; ABK; MBI)

Two from MarketWatch and a teaser from CapitalStool.
From MW:

Bond insurers may reject $800 bln reinsurance offer, Ackman, Chanos say
...The offer excludes the bond insurers' structured finance businesses, which have billions of dollars of exposure to complex mortgage-related securities known as collateralized debt obligations (CDOs). The market is increasingly concerned that losses on this part of the business will threaten bond insurers' crucial AAA ratings. But some companies have argued that short-term, market-based losses on these guarantees won't turn into very large actual losses.

"He's calling the bond insurers' bluff," said Bill Ackman, head of Pershing Square Capital Management LP, a hedge fund firm that's been shorting, or betting against, shares of MBIA and Ambac....MORE

Warren Buffett's letter to bond insurers

Below is the text of the letter sent by Ajit Jain, president of Berkshire Hathaway Reinsurance, to MBIA's bankers at Lazard Ltd.
February 6, 2008
Mr. Gary Parr
Deputy Chairman, Lazard
Dear Gary:

As you know, many constituencies in the financial markets have been increasingly focused on the emerging issues in the financial guaranty industry for several weeks now. In fact, we ourselves have had several meetings with the New York Insurance Department to explore whether there is something we can do under the current circumstances that would be helpful in addressing the growing concerns in the financial marketplace. Unfortunately, the structured finance "side" of the business, with its many moving pieces and interdependent variables, has proven to be beyond our ability to adequately analyze.

Nonetheless, we are ready and willing to lend our reinsurance support to the municipal side of the house, and in fact had set out in a letter to the New York Superintendent of Insurance a concept that we believe would address the needs and concerns of main street America's municipalities. The Superintendent has no objection to our approaching you with this proposal. We would like to meet with you and your client, MBIA, to discuss whether MBIA would have any interest in the proposal .

The key elements of the proposal we described to the Superintendent were: (1) we would raise the capital level in our monoline insurer, Berkshire Hathaway Assurance Corporation (BHAC), to $5 billion; (2) we would assume by reinsurance the muni bond portfolio of several of the monoline companies for a premium of 150% of the existing unearned premium reserves of the companies...MORE

From CapitalStool:

Sheriff Calls Their Bluff
In another in our series The Best of Capitalstool.com, stoolie Jimi gives us the story behind the story of Warren Buffet’s offer for the muni bond business of the monoline insurers.

Interesting exchange on the Buffett offer on crapvision. I didn’t hear the original phone call, but Beckie Quick seemed to indicate that Buffett has only thrown a line to the munis, in part, because the monolines maintain that the non-muni market still retains value. Since Buffett can’t evaluate that claim, he won’t offer to reinsure those, too - he can only offer the reinsurance to that which he understands, and when the munis are trading n a manner that suggests that they no longer possess the AAA wrapper, then there’s an opportunity for someone like Buffett.

It seems clear that the monolines can’t jettison their low risk business to defend and support their high risk business. Which is why Buffett’s offer is likely DOA. But here’s the thing as I see it - Buffett is calling the monolines’ bluff on their claims of value for the non-muni portion