Tuesday, February 12, 2008

Buffett names his price

Warren Buffett's latest offer to re-insure up to $800 billion of municipal bonds held by the mono-lines should come as no surprise.

Buffett's price is one & a half times the unearned premium on these municipal bonds, nearly double the price originally charged by these monoline insurers (MBIA,Ambac & FGIC). Its a steep price & as of this time, two of the monoline insurers (one is Ambac) have spurned Buffett's proposal.

Buffett's big pricetag does highlight the bargaining power Berkshire Hathaway has at this time and his own view that the mono-line insurers are facing a desperate financial situation.

If all the mono-line insurers reject Buffett's proposal , they are likely to face an even more hard-line from Insurance regulators who may seek to preserve capital for the policyholders by preventing dividends being paid from the insurance subsidiaries to the bond insurer holding companies. As I have said previously, the insurance regulators are intent on stabilising the municipal bond market and while doing this in a commercial way would be ideal, they may be left with no option but to engage in more direct intervention to protect capital and municipal bond markets.

Finally, Buffett & Berkshire are expected to dramatically raise their profile in the municipal bond underwriting area over the coming year. If Buffett doesn't succeed in reinsuring the municipal bonds held by the bond insurers, he will succeed in stealing away new business.

Here's the CNBC interview transcript with Warren Buffett


Ajit Jain's letter (which walks us through Berkshire's reasons for the deal and proposed price) - thanks Berkshire Shareholders at MSN board for this one!


Disclosure: I own shares in Berkshire Hathaway (BRK)

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