Once again, much to do over nothing is being made of Buffet’s offer to the monolines (at least as far as the health of the monolines themselves is concerned).

Today’s news is Buffett offers 800 billion dollar backup to troubled bond insurers.

Billionaire tycoon Warren Buffett on Tuesday offered to reinsure 800 billion dollars in municipal bonds now insured by three troubled reinsurers hard hit by the US mortgage and credit crunch.

Buffett discussed the offer to Ambac (ABK), MBIA (MBI) and FGIC (FGIC), insurers at risk of losing their AAA credit ratings due to problems with subprime, or high-risk, mortgages and other loans, during a telephone interview with the CNBC business television network.

Buffett, a legendary American investor, said he had sent that offer to the bond insurers last week, and that he was giving them 30 days to find a better deal. Buffett, who heads Berkshire Hathaway, said one bond insurer had turned down the offer and the other two had not responded, without giving more precise details.

The Kiss Of Death

Nothing has changed since I wrote Buffett Signs Death Warrant For Ambac & MBIA.

Buffett smells an opportunity here and he is likely correct. Furthermore he is not going to make the mistake that both Ambac and MBIA made in insuring CDOs, subprime mortgages, and other toxic waste.

Here’s Bloomberg’s take on the story: Buffett Offers to Assume Muni Liabilities of Insurers.

“Buffett is offering to take the fattest, most profitable part of their business,” said Jerry Bruni, president and portfolio manager, at J.V. Bruni and Co. in Colorado Springs, Colorado. Bruni has $650 million under management including Berkshire shares. The firm sold MBIA last month. “I can’t imagine why they would want to do that. If I were MBIA or Ambac, this does not sound like a good offer.”

“The insurance in the market is not doing bondholders any good and is in some cases penalizing bond investors,” Buffett said on CNBC. “Our proposal puts the municipals at the front of the line.”

If the municipal debt was reinsured by AAA rated Berkshire, the borrowers would also retain the top rating, Buffett said. Without AAA ratings, thousands of schools, hospitals and local governments may be forced to pay higher interest and some fund managers would be forced to sell any holdings that lose their top rating.

“You would see a greater supply hit the market so you could easily have a disruption for a while,” Buffett told CNBC.

This plan “would solve it in one stroke of a pen,” Buffett said.

Ambac’s and MBIA’s guarantees are worthless. The reason one monoline quickly turned down Buffett’s “gracious” offer is because they know it would be the end of the line for them. So instead they cling to a miracle that will never happen.

Buffett will cherry pick the good debt and leave Ambac and MBIA with the garbage, it’s as simple as that. Anyone who thinks this is a bailout for the monolines is mistaken. Here’s proof.

Ambac Daily Chart

click on chart for sharper image

MBIA Daily Chart

click on chart for sharper image

That’s Some bailout!
Ambac is down 9% on the news and MBIA is down 8% on the news.

Yes Virginia, there is a credit crunch.

The real news about municipals comes from Professor Bennett Sedacca who just yesterday wrote:

One of my best sell side sources just told me there were 11 failed auctions at Lehman (LEH) on Friday, some at Goldman (GS) and 11 at Citi (C) today.

On top of that, SLMA was forced to pay 7 1/4 % for AAA 35 day money.

Yes Virginia, there is a credit crunch.

In a failed auction, basically the re-marketing agent gets all sell orders and no buy orders. This is a sell imbalance at its worst and the municipality doesn’t get the cash. If it happens more than once, the broker calls the issuer and says ‘Mr. issuer, if you want money, you had better go to the fixed rate window’. And the fixed rate window, with the economy floundering and the insurers all but bankrupt (certainly not writing any new business), is kinda closed too.

So be careful out there, real careful. If this turns into a rout, it could reverberate through the economy. Big time.

Inquiring minds may also with to consider Municipal Bonds The Next Shoe To Drop, also by professor Sedacca.

Can Buffett add liquidity to the municipal bond market? You bet. The price will be the kiss of death for the monolines themselves.


This will calm the muni market (at least for a while) and I suspect that Ambac and MBIA will be forced into the “offer”. Buffett in one fell swoop knocked out the stated need for a bailout of the monolines (the muni market itself).

Of course the muni market itself has little to do with the real reason banks were scrambling for a bailout. The real reason was and still is the masses of now worthless CDOs banks are sitting on supposedly “insured” by the monoclines.

Mike “Mish” Shedlock
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