Buffett $5B Offer May Be Too Low

123jump.com Staff
12 Feb, 2008
New York City

Warren Buffett, chairman of Berkshire Hathaway, made a low offer to reinsure $800 billion of municipal bond liabilites of three bond insurance companies, Ambac, MBIA, and FGIC. The offer was quickly rejected by one insurer and others did not show much enthusiasm. The Buffett offer includes only municipal bonds and does not cover any of the mortgage securities related liablities.

[R]9:20AM New York – Buffett makes a low-ball offer to purchase municipal bonds liabilities from bond insurance companies.[/R]

Warren Buffett offered for $5 billion municipal bond liabilities of three bond insurance companies worth $800 billion.

U.S. stocks futures rose ahead of market opening after a report that Warren Buffett, chairman of Berkshire Hathaway Inc offered to reinsure municipal bonds insured by three largest bond insurance companies, FGIC, MBIA, and Ambac Financial Group.

The offer first reported on CNBC television network and later on quoted in Bloomberg news was turned down by one insurer and still under consideration by the other two.

The offer from Buffett includes a plan to inject $5 billion in capital guarantee to insure bond liabilities worth $800 billion. The new capital from Berkshire will secure a rating of AAA from the rating agencies and protect the bond holders from future downgrades of securities.

The offer does not include the sub-prime loans that are at the center of credit market malaise.

It is not clear why will bond insurers bite such an offer. The Buffett offer only includes the healthy part of the business and will also be thinly capitalized. To cover $800 billion liabilities with less than 0.6% of capital in the current market environment may not calm financial markets.


Separately, bond insurers can also spin-off these liabilities as a separate subsidiaries and protect cash flow and secure higher bond ratings on these bonds that are relatively stable and credit loss free.