Yep. Warren Buffet puts his money where his mouth is.
Buffett told CNBC that he has offered leading bond insurers a plan in which he would reinsure some $800 billion in municipal bonds, effectively guaranteeing them a AAA credit rating.
Buffett extended his offer to Ambac and FGIC and is giving them 30 days to make a decision, though he said that he was rebuffed by one of the companies.
That’s a hell of a thing to do. Putting up $800 billion of your own money given the rising default rates on these near junk bonds? What gives?
What gives is that Warren’s only playing the safe side of the street.
“Mr. Buffet has, very wisely, both a PR victory and an economic victory if it comes off,” Art Cashin, director of floor operations for UBS, told CNBC, “because he’s only gonna insure the municipal side — that’s not the threatened side of those portfolios.”
Not threatened YET anyway. So why’s Warren doing this, anyway?
One, he thinks he’ll make a profit from it. Two, he knows if the monolines go down, it’s game over. He’s personally staking the monolines because he knows the consequences of them going down would wipe him out.
But what Buffet is doing may backfire.
The risk of bond insurers MBIA Inc. and Ambac Financial Group Inc. defaulting rose after billionaire Warren Buffett offered to assume responsibility for $800 billion of municipal debt, excluding subprime-linked securities.
Credit-default swaps on Armonk, New York-based MBIA rose to $1.75 million upfront and $500,000 a year to cover $10 million of debt for five years, from $1.6 million in advance yesterday. Contracts on New York-based Ambac rose to $1.75 million upfront from $1.5 million, according to CMA Datavision. The contracts trade upfront when investors see a risk of imminent default.
Buffett is attempting to take advantage of bond insurers as they seek to raise capital and avoid downgrades to their AAA credit ratings. Buffett’s Berkshire Hathaway Inc. plans to insure municipal debt for 1.5 times the premium charged by the bond insurers to take on the guarantee and will put up $5 billion of capital, he said in an interview with CNBC television.
“It’s taking away their cash cow and leaving them with the toxic waste,” said Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California.
Buffet is in fact picking off the prime rib and leaving behind the gristle and bone. The problem is in the long-run, the monolines are worse off than before…but in the short run they may have to take Buffet’s money on Buffet’s terms.
So far…they aren’t biting.
One company has already rebuffed the proposal and the two others haven’t responded, Buffett told CNBC television.
“Buffett is trying to get hold of the most secure section of financial guarantee market for a modest price,” David Roche, who runs London-based research firm Independent Strategy, said in a note to investors. “But it does not really solve the problem of credit defaults in structured finance or the danger of counterparty failure if the monolines go belly up.”
In other words, Buffet’s trying to make a mint off what’s left of a dying company the industry needs kept on life-support, while looking like a hero. Wall Street can’t complain TOO much because if the monolines go under, the derivatives game collapses and takes trillions with it.
Meanwhile, the Fed is bailing out the mortgage industry with a plan to freeze foreclosures.
Six top mortgage lenders and servicers Tuesday launched a new program aimed at staving off foreclosure for seriously delinquent borrowers in the hopes that new, more affordable loan terms can be worked out.
“Project Lifeline,” backed by the U.S. Treasury and Department of Housing and Urban Development, would pause foreclosure proceedings for borrowers more than 90 days in arrears while services determine whether they could make payments under new terms, the lenders said in a statement.
The effort would cover all types of home loans, unlike an earlier plan aimed at freezing interest rates for subprime mortgage holders who cannot afford rates that reset to higher levels.
Again, the devil’s in the details. It’s a tacit admission that all kinds of homeowners — not just subprime customers — are now having trouble making mortgage payments.
Like Buffet’s “generous offer” this is nothing more than a band-aid to fix a sucking chest wound. It does nothing to solve the cause of the problems, only to delay the worst of the symptoms until the next President gets to deal with it.
But then again, that’s the game plan, now isn’t it?