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February 13, 2008
Buffett makes a move
Last month, I speculated that Warren Buffet might be able to play the famous role of JP Morgan in calming financial jitters. Yesterday, that happened—sort of. In an interview on CNBC, Buffett announced that Berkshire Hathaway is willing to reinsure the municipal bonds currently backed by MBIA, Financial Guaranty Insurance and Ambac (the three big monoline insurers). (See DealBook - New York Times for links to the video and transcript.) And the stock market rallied.
Let’s not get too excited about this, though. The move is specifically aimed at the municipal bond market. As such, it may help clam jitters in that market. A Wall Street Journal story notes:
"Within the municipal-bond market it would be a positive," says Dan Solender, head of the muni-bond investment team at Lord Abbett & Co. "The market is trading right now as if there is no value to the insurance, and if [Mr. Buffett] came in and reinsured them, then they would have their triple-A rating back."
But, as the Journal story points out, the deal won't necessarily help the current monoline insurers, as the "offer to hive away their low-risk muni businesses would leave them with little more than risky, complex debt securities backed by deteriorating mortgage debt."
One analyst, quoted in the New York Times put it this way:
“Essentially, if any of the companies were to take him up on this offer, it would be almost them waving a white flag saying that they are done,” said Rob Haines, an analyst at the research firm CreditSights. “It does not make sense to give up what is the good part of your business.”
In my posting last month, I pointed out that a key factor in the credit market meltdown has been the loss of confidence in the underwriting standards. Investors don't trust the current system. Because of this, Buffett has the opportunity not only to calm the markets but also to catalyze fundamental long term change. If he gets into the bond insurance business—beyond taking over some existing policies on municipal bonds—he is likely to set very strong standards. Those standards may be just what the market needs right now.
So, a small step was taken yesterday—with a very smart businessman looking to skim off some cream. It was neither the white knight to the rescue (the positive spin) nor the monoline investor bailout (the negative spin) that some may have hoped for. But it was a cautious step in the right direction.
Posted by Ken Jarboe at February 13, 2008 8:23 AM
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