Tuesday, February 12, 2008

Buffett Offers Monolines a Lifeline (BRK.A: ABK; MBI)

The WSJ's MarketBeat blog has a post showing just how sharp Warren is.
(and how a deep understanding of one's business can make the moves seem as pre-ordained as a chess Grandmaster's v. moi)

Warren Buffett is throwing the monoline insurers a lifeline — but that doesn’t mean the Berkshire Hathaway chair has decided to wade into the deep end of the pool when it comes to risky assets.

The bond insurers have gotten themselves in deep trouble by promising to cover payments to bondholders in the case of a default on esoteric forms of debt such as collateralized debt obligations backed by subprime mortgages, a far cry from what was regarded as a safer business — and for years, their bread-and-butter — insuring municipal bonds.

Mr. Buffett’s largesse, however, isn’t going in the direction of the riskier investments. He’s offered to provide reinsurance (a second level of insurance) on $800 billion in municipal bonds only. The offer was made to Ambac Financial Group, MBIA and FGIC. It’s notable in that it would help these entities recapitalize, but also puts the squeeze on them as they’re put in a situation similar to when markets freeze up and certain assets won’t trade — investors sell what they can, not what they want to.

“Quite frankly I think that is a net negative for these guys — take away the best business and most stable cashflows they have and leave them with toxic waste, much higher earnings volatility, and maybe even their business model falls apart,” says Tim Backshall, chief credit derivatives strategist at Credit Derivatives Research....MORE