Buffett sees opportunity in muni bonds
Warren E. Buffett has a reputation as a philanthropist who cares deeply about the social issues of the day.
But on Tuesday, the billionaire lived up to another part of his reputation: that of an opportunistic investor.
Buffett said he had made an offer to three struggling bond-insurance companies to help them insure $800 billion in municipal bonds.
In an interview on cable channel CNBC, Buffett said he was willing to reinsure muni bonds now covered by MBIA Inc., Ambac Financial Group Inc. and Financial Guaranty Insurance Co. In effect, Buffett is offering to insure the companies against any losses they incur on the tax-exempt issues.
As home loan delinquencies have soared, the insurers have been slammed by fears of the costs they’ll face to cover insurance they wrote on sub-prime mortgage-backed bonds.
That, in turn, has raised concerns about their ability to back muni bonds, their original line of business. But because defaults on muni bonds historically have been relatively rare, many analysts saw Buffett’s move as an attempt to skim the cream from the companies while leaving them with a worsening situation in the sub-prime insurance business.
“It would be getting rid of their good business,” said David Schiff, publisher of Schiff’s Insurance Observer newsletter. “Is that a wise thing to do?”
Indeed, investors in the insurers’ shares reacted negatively. MBIA shares plunged $2.08, or 15%, to $11.50. Ambac slumped $1.58, or 15%, to $8.90. FGIC is privately held.
Buffett’s holding company, Berkshire Hathaway Co., has long been a major player in many insurance sectors. It owns the auto insurance firm Geico Corp., for example.
Late last year, Buffett launched a muni-bond insurance company, Berkshire Hathaway Assurance, to move into the market as the woes of MBIA and others multiplied.
Ajit Jain, a top executive for Buffett, sent a letter to MBIA’s investment banker spelling out the details of Buffett’s offer. The letter, posted on Fortune magazine’s website, said Buffett’s insurance arm would charge the bond insurers 1.5 times the premiums they earn for covering muni bonds.
Although Jain conceded that the price might appear “excessive,” he said Berkshire Hathaway could earn more by simply insuring bonds on its own. The arrangement Buffett put forth, Jain said, would be “serving the greater public good” by helping to calm the “currently unstable marketplace conditions for the municipal business.”
Worries about the financial health of the insurers have roiled the muni bond market in recent months, pushing up yields on long-term muni issues even as yields on U.S. Treasury bonds have fallen sharply.
What’s more, in recent days investors have balked at buying muni issues in auctions regularly held by major brokerages, further upending the market.
One key concern is that bond insurers could lose their top-rung credit ratings, which would immediately slash ratings on the muni bonds they insure. That has fueled efforts by New York’s insurance superintendent, Eric Dinallo, to try to work out a plan for big banks to pump capital into the insurers.
For muni bond investors, Buffett’s plan would be a “sweet deal” by preserving the AAA credit rating on insured muni issues, said George Strickland, a bond fund manager at Thornburg Investment Management in Santa Fe, N.M.
Still, Buffett admitted on CNBC that it didn’t appear that insurers were “leaping for the door to say ‘yes’ to us.” CNBC later said Ambac specifically had rejected the offer. MBIA and FGIC didn’t publicly respond to the offer.
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Hamilton reported from New York; Petruno reported from Los Angeles.
tom.petruno@latimes.com
