Credit Crisis May Prove Windfall for Berkshire - WSJ

Recent bond-market turmoil has major upside potential Warren Buffett's Berkshire Hathaway, as bond insurers like MBIA Inc. turn to the massive insurer for a source of capital relief while their books are scrutinized by investors and ratings firms, the Wall Street Journal reports. Over the past few weeks, sources say, every major bond insurer has reached out to Berkshire. Their dialogue, among other things, affords Buffett the opportunity to size up various firms' operations. Besides municipal bonds, which are the bulk of insurers' portfolios, they also collectively insure some $100 billion of riskier CDOs (collateralized debt obligations), which have recently become the subject of ratings downgrades. More recently, rating agencies have begun re-evaluating bond insurers to gauge whether they have sufficient capital to weather worse-than-expected claims. The need for contingent capital and a dry-up in debt markets has them turning to Berkshire -- the only AAA-rated reinsurer in the world. Buffett, the Journal says, has been betting investors are overestimating the risks of certain investments. While bond insurers need not reinsure CDOs specifically to tune-up their portfolios, the Journal says it is likely Buffett wouldn't avoid reinsuring some highly-mispriced CDO portfolios at a hefty premium. Berkshire recently disclosed $2.5 billion in premiums on the sale of derivative contracts, which could possibly include CDOs. Sources say it's unlikely Buffett would acquire a bond insurer, but say he may set up a financial guarantor that takes advantage of excessive prices.

Sources: Wall Street Journal
Commentary: What Went Wrong in the CDO Market • CDO Hedge Funds = Enron ? • How Does a CDO Work?
Stocks to watch: BRK.A, MBI

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