Berkshire Hathaway Now Says They May Invest in Guarantors

Hhhm, wonder whether more influential people said privately what we said publicly, that Berkshire’s move into muni bond insurance was a punch in the gut to already reeling bond guarantors. They desperately need more capital if they are to maintain their ratings, which is essential to their business model, but who in his right mind would bet against Buffet?

This observation isn’t terribly profound, but additional news coverage of Berkshire’s move yesterday, in combination with the further deterioration of the stock prices of the guarantors due to bankruptcy rumors about Countrywide has led Berkshire to say they are also looking at putting capital into existing players.

Note that “looking” and writing checks are two different states of affairs. But this was the sort of sop needed for a rocky market, and at least makes Berkshire look like it is not necessarily profiting at the expense of the wobbling bond insurers. In general, I don’t have much sympathy with financial players that take on too much risk out of a misguided effort to boost profits. However, as noted here and elsewhere, downgrades of any of the major bond guarantors would produce a great deal of collateral damage.

Berkshire seems unlikely to buy any of the big players; their exposures are so far out of line with their equity bases that it is hard to imagine that even a distressed price would make economic sense. But the Omaha company could well provide support on a limited basis, say acquiring certain portfolios of risk or providing reinsurance.

From Bloomberg:

Warren Buffett’s Berkshire Hathaway Inc. may invest in other municipal bond insurers after launching a competing company last month.

“We’re looking at multiple ways to participate in the industry,” Ajit Jain, head of Berkshire’s new bond insurer, said today in an interview. Berkshire, based in Omaha, Nebraska, is “looking at ways to support the existing insurers in terms of reinsurance and capital,” he said.

Berkshire Hathaway Assurance Corp. is challenging bond insurers such as Armonk, New York-based MBIA Inc. and New York- based Ambac Financial Group Inc. The two largest established firms are struggling to retain the AAA credit ratings that give them the financial credibility to guarantee bonds issued by state and local governments….

The companies stumbled as they expanded beyond municipal securities into structured finance such as collateralized debt obligations, which package pools of bonds and loans and slice them into separate pieces. Berkshire would probably only reinsure the safest debt guaranteed by bond insurers, said Erin Archer, an analyst at Thrivent Financial for Lutherans, which manages about $75 billion in Minneapolis.

“Not everything that MBIA and Ambac insure has deteriorated,” said Archer. “Jain and the folks at Berkshire are savvy enough to figure out what’s relatively clean or at least priced at levels that are irrational on those company’s books. They may be able to cherry pick the bonds they reinsure.”

Berkshire slipped $3,285, or 2.5 percent, to $130,400. The stock gained about 19 percent over the last 12 months.

Jain declined to comment on speculation Berkshire will purchase Dexia SA’s Financial Security Assurance Holdings Ltd.

`We don’t discuss what we’re buying and selling,” Jain said.

Betsy Castenir, a spokeswoman for New York-based Financial Security, declined to comment. Dexia, based in Brussels, is the world’s largest lender to local governments.

Print Friendly, PDF & Email