Buffett's Offer: Great for Him, Terrible for Bond Insurers

As someone who is long Berkshire Hathaway (BRK.A) and short MBIA (MBI) and Ambac (ABK), Buffett's disclosure of his offer this morning is great news. This is exactly the kind of enormously favorable opportunity to put a lot of BRK's money to work on great terms that comes from others' distress -- and there's a lot of distress out there, and there will be a lot more.

Why did Buffett go public with his offer? It puts a lot of pressure on the bond insurers to take the offer, reduces the chances of a government bailout, and/or might help push Dinallo to directly or indirectly put the companies into run-off.

The markets are very quickly figuring out that Buffett's offer is great for him -- and terrible for the bond insurers (MBIA is down 5% and Ambac is flat after being up all morning -- go figure). You can hear what Buffett had to say by clicking this video link posted on CNBC.

Buffett had all sorts of interesting comments:

-- At 4:30 into the first video, he points out correctly that munis are at the back of the line -- in other words, if nothing is done, the CDOs will default first, suck at all claims-paying resources, leaving nothing to pay for any muni bonds that default later...

-- He's offering to take on the bond insurers' muni debt in exchange for 1.5x the remaining payments the bond insurers would receive; he says this is fair because Berkshire is currently being paid 2x for being SECOND to pay (only if the main insurer doesn't pay);

-- When asked about AIG, he made a funny comment about having called derivatives financial weapons of mass destruction, but maybe he should have called them financial weapons of selective destruction;

-- A great quote in response to John Bogle, who said the ratings agencies are complicit in this mess, Buffett said (roughly): "When you have an AAA-rated company issue bonds at 14% in a 4% interest rate environment, you are now seeing the cow jump over the moon."

-- When asked why a bond insurer would give up its best business to him, Buffett said "they would be releasing regulatory capital equal to what they're paying us", and they could then use this to cover losses elsewhere.

Cramer has this right:

Not buying it. Not buying the Buffett investment story. Anyone would love to take the muni business from Ambac (ABK) and MBIA (MBI) because it is a fabulous annuity stream. It's pristine and easy and leads to gigantic profits.

The only way you would allow Buffett to take the good part over is if you pre-packaged a bankruptcy around the rest or put them in runoff mode, because there is nothing but losses that are being insured -- so much of the most toxic paper has guarantees by these two over-their-heads stooges.

So does Bloomberg:

Buffett is attempting to take advantage of the distress among bond insurers by picking off the profitable municipal guaranty business and leaving MBIA, Ambac and FGIC with debt that has caused more than $5 billion in losses. The three companies are struggling to maintain their AAA ratings after writedowns on the value of mortgage guarantees.

``If you gave up your entire municipal business, that's the book of business where the value in the companies is right now,'' said CreditSights Inc. analyst Robert Haines. ``You'd essentially be ceding that whole book to Buffett and what you'd be left with would be the book of business where all the troubles are.''

The bond insurers lend their AAA stamp to $2.4 trillion of debt, and are sitting on losses of as much as $41 billion, according to JPMorgan Chase & Co. analysts.

Full disclosure: Long BRKa, short ABK and MBI

Comments

[User 142410]

...paint Buffet as the miser he is, never i
"invested" in anything - investments create wealth, better the standard of living, lightbulbs, electricity, software - all this clown knows is coca cola and state sponsered insurance scams (as is the entire industry) - never created a f*king thing and will die with a big pile of cash - BFD

[jtb3]

Mr Tilson - I agree with everything in your post, but I wonder if your short position has now become dead money (for a while at least). If Mr. Buffett's plan goes through, the remaining muni insurance capital at MBI and ABK will be put towards the structured insurance capital. At that point, the insurance commissioner loses his incentive to help municipalities and has much less incentive to help structured finance holders. Even if the ratings agencies downgrade MBI and ABK and/or both go into runoff, there should be enough capital to sustain P&I payments for many years. Possibly even pay a dividend to the holding company. What's the potential liquidity crisis that will BK the parent companies now? Isn't the most likely scenario now a very slow death and not a capitulation?

[R. Richard Schweitzer]

Note that W.B. does not say that the R/I premium is based on the risk or on it's "term return" (as say in Cat Covers) it is based on the benefit to the capital account (statutory surplus) of the reinsured. This is not R/I, it is 'banking.'

The NYSID can put together a R/I "pool" that the legislature would approve in a heartbeat, that would run for a term (about 15 years), banks, funds and public authorities could fund it quickly with a reasonable rate of return (not 14% tho').

W.B. has shown the way! Lead, follow or get out of the way!

[spider13]

This might be terrible for the bond insurers but...

What is the alternative? If/when the bond insurers go under, doesn't Berkshire end up as the insurer of choice for most munis anyway?

[ballsschweaty]

Buffet went public because he has the hots for Becky Quick.

[tessant]

good move for buffet; not sure if it was good for the people on the other end.

scott w
www.growthportfolio.ni...
"the facebook of investing"

[mkreisel]

Bond insurers messed up, and they deserve to be punished by the market forces. But there is no reason to punish all the municipal bond issuers. What Buffett is trying to do is to make (big) money for himself, bail municipalities out, and screw over the bond insurers.

Nobody would shed any tears for them except their unfortunate stock holders.

[Augustus]

Bond Insurers "screwed over" themselves.
This deal will have a whole lot of Regulator appeal. Almost irresistable.
Regulators and their bosses get funded through the Muni Mkt.
This will allow them to keep on doing business as usual. Restores the Muni mkt to what it was.
How can a Regulator resist?