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Tuesday, February 12, 2008


not a bond insurer bailout

the wire is full of warren buffett this morning as berkshire hathaway has pitched an offer to the troubled industry to take on the entirety of their $800bn in municipal guaranty book.

If the municipal debt was reinsured by AAA rated Omaha, Nebraska-based Berkshire, the municipalities would also retain the top rating, Buffett said.

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

The downgrade of a large bond insurer would force some insurers to sell any municipal debt that didn't have an underlying AAA rating.

``It would solve it in one stroke of a pen,'' Buffett said of the plan.

it would be very good news for the entire muni bond market. but the monolines are questionable, even unlikely to take the deal.

``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.''

while it would very likely put the increasingly illiquid muni bond market at ease -- and remove all kinds of investors from money market funds to pension plans from the jeopardy of forced liquidation when the monolines are downgraded and their insurance goes worthless -- this does little to "fix" the issues MBIA, ambac and FGIC in particular. they'd still be saddled with their CDO claims, and that in and of itself is enough to sink them over time. and they'd be sacrificing the income stream from their stable book of businsess which could in the end help them ride out CDO losses and CDS defaults.

as tanta at calculated risk noted:

That would be precisely the kind of "bailout" that leaves the consequences of moral hazard in place. Who could dislike it, except those who engaged in reckless insuring in the first place?

those are, for better or worse, exactly the people who would have to like it to get the thing to go forward.

for what it's worth, i have to imagine buffett has some very powerful regulatory forces at his back, and the monolines may be heavily pressured to take the deal for the good of the muni market. but it would actually seem to destabilize the market in credit default swaps and CDOs, as these companies might be less likely to receive a private or public bailout without some good in their portfolio to go with the bad.

UPDATE: initial and more from yves smith.

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