« Economic stimulus | Main | Innovation Metrics report »
January 22, 2008
Buffett and Morgan
Here is a crazy thought: can Warren Buffett play in today's credit market meltdown the role that JP Morgan once played in the stock market? No, I'm not suggesting that Buffett can stem a loss-of-confidence based stock price slide like Morgan did. But Buffett may be able to restore some confidence to the credit markets - specifically to the asset-back securities markets, and by extension to the rest of the markets and the economy as a whole.
Let me explain. One of the structural causes of the current economic "situation" is the melt down in the asset-backed securities market, triggered in the subprime market. Once subprimes started to fall apart, it became clear that the rest of the market was also on shaky ground due to the slicing and dicing of the securities known as Collateralized Debt Obligations (CDOs). The collapse of the CDOs is taking the monoline bond insurance companies down with it. The result is not only a large capital loss but a dramatic tightening of credit with no one able to provide the bond insurance.
Into this gap steps Mr. Buffett. As I noted earlier, Berkshire Hathaway Assurance Corp is now guaranteeing state and municipal bonds in New York. That is an opening for Buffett to get into the business in a larger way. But, you can be sure that he is going to set some rather strict standards for what gets backed. Those criteria could quickly become the proverbial gold-standard for the industry. With such standards in place, investors may be willing to come back into the water again.
By the way, it is interesting to keep in mind how Berkshire Hathaway got into this business. It was a call from New York State Insurance Commissioner Eric Dinallo with the suggestion because the state needed someone to back the state and municipal bonds in order to maintain those bond's top ratings (see A Regulator Not Stymied by Red Tape - New York Times). A perfect example of government and market working together (in what some might call "industrial policy").
Posted by Ken Jarboe at January 22, 2008 1:05 PM
Trackback Pings
TrackBack URL for this entry:
http://www.athenaalliance.org/mt/mt-tb.cgi/1751