Bonded by Buffett
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Bonded by Buffett
For Warren Buffett, timing is everything. And with credit markets tightening, prices likely to rise, and longstanding competitors on the ropes, it may be the perfect time for the überinvestor to move into the business of offering bond insurance for cities, states, and government bodies. Buffett, who has long been a big player in insurance with such companies as Geico, sees opportunity in the industry's tumult, longtime colleague Ajit Jain told BusinessWeek on Dec. 28.
"Our hypothesis is that the pricing is going to firm up going forward and we will reach a level we will find attractive," says Jain, who heads Buffett's reinsurance business in Stamford, Conn. "If that were to happen—and I hope it will happen—then we are in a state of readiness and we'd start writing municipal bond insurance."
Buffett's Berkshire Hathaway Assurance (BRKB) is moving gingerly but deliberately into the business and will give longstanding players a run for their money. The company is expected to gain a license from New York state insurance authorities by Dec. 31 and, says Jain, will soon afterward seek approval to operate in California, Puerto Rico, Illinois, Texas, Florida, and Massachusetts. "There's no formal plan," he says. "It's one step at a time."
Big players in the business, such as MBIA (MBI) and Ambac Financial Group (ABK), have been struggling amid anxieties about potential defaults on bonds and other debts they guarantee are supported by subprime mortgages. As a major part of their business, such outfits guarantee the bonds issued by government entities to finance public works such as schools and sewer systems. Even though their risks for government-bond defaults are small, their exposures in other areas are worrying investors and rating agencies and forcing them to seek hefty dollops of capital to preserve their high ratings.
http://www.businessweek.com/bwdaily/...pStories_ssi_5 (full article)
"Our hypothesis is that the pricing is going to firm up going forward and we will reach a level we will find attractive," says Jain, who heads Buffett's reinsurance business in Stamford, Conn. "If that were to happen—and I hope it will happen—then we are in a state of readiness and we'd start writing municipal bond insurance."
Buffett's Berkshire Hathaway Assurance (BRKB) is moving gingerly but deliberately into the business and will give longstanding players a run for their money. The company is expected to gain a license from New York state insurance authorities by Dec. 31 and, says Jain, will soon afterward seek approval to operate in California, Puerto Rico, Illinois, Texas, Florida, and Massachusetts. "There's no formal plan," he says. "It's one step at a time."
Big players in the business, such as MBIA (MBI) and Ambac Financial Group (ABK), have been struggling amid anxieties about potential defaults on bonds and other debts they guarantee are supported by subprime mortgages. As a major part of their business, such outfits guarantee the bonds issued by government entities to finance public works such as schools and sewer systems. Even though their risks for government-bond defaults are small, their exposures in other areas are worrying investors and rating agencies and forcing them to seek hefty dollops of capital to preserve their high ratings.
http://www.businessweek.com/bwdaily/...pStories_ssi_5 (full article)
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MBIA, Ambac Bond Default Risk Exceeds 70%, Swaps Show
Big news in muni-land, ABK lost it's AAA status today. 
http://www.bloomberg.com/apps/news?p...d=aWo7PuRpWV4s
MBIA Inc. and Ambac Financial Group Inc., the two biggest bond insurers, have a more than 70 percent chance of going bankrupt, credit-default swaps show.
Prices for contracts that pay investors if Armonk, New York- based MBIA can't meet its debt obligations imply a 71 percent chance the company will default in the next five years, according to a JPMorgan Chase & Co. valuation model. Contracts on New York- based Ambac imply 72 percent odds.
Ambac shares have plunged 71 percent the past three days as the company scrapped plans to raise equity capital and Moody's Investors Service and Standard & Poor's put the insurer on review for a downgrade. Fitch Ratings cut Ambac's AAA guaranty rating today. MBIA has dropped 47 percent since Jan. 15. Credit-default swaps on the companies, which rise as confidence erodes, are trading at record highs.....
Prices for contracts that pay investors if Armonk, New York- based MBIA can't meet its debt obligations imply a 71 percent chance the company will default in the next five years, according to a JPMorgan Chase & Co. valuation model. Contracts on New York- based Ambac imply 72 percent odds.
Ambac shares have plunged 71 percent the past three days as the company scrapped plans to raise equity capital and Moody's Investors Service and Standard & Poor's put the insurer on review for a downgrade. Fitch Ratings cut Ambac's AAA guaranty rating today. MBIA has dropped 47 percent since Jan. 15. Credit-default swaps on the companies, which rise as confidence erodes, are trading at record highs.....
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Originally Posted by special-ed
Wow, I'm surprised Buffett is in the insurance business! I thought guys like that were "a dime a dozen."
What's your point? That selling and issuing insurance is a hugely profitable business, wow - we didn't know that.
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Originally Posted by special-ed
Wow, I'm surprised Buffett is in the insurance business! I thought guys like that were "a dime a dozen."
Great article Silver. Thanks!
Great article Silver. Thanks!
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Banks May Need $143 Billion of Reserves for Insurer Downgrades
By Steve Rothwell Jan. 25 (Bloomberg) --
http://www.bloomberg.com/apps/news?p...d=aYQVdsjDrc2M
Banks worldwide may need to raise as much as $143 billion of additional reserves to satisfy regulators if bond insurer rating cuts trigger downgrades for the securities they guarantee, Barclays Capital analysts said.
Banks will need at least $22 billion if bonds covered by insurers led by MBIA Inc. and Ambac Financial Group Inc. are cut one level from AAA, and six times more for downgrades by two steps to A, Paul Fenner-Leitao wrote in a report published today. The estimates are based on banks' holdings of the outstanding $820 billion of structured securities covered by bond insurers, the report said.
``This is a huge amount, but the assumptions we use are also very aggressive,'' Fenner-Leitao said in an interview. The estimate was designed to show how bank capital could be affected if bond insurers are downgraded significantly, he said.....
Banks will need at least $22 billion if bonds covered by insurers led by MBIA Inc. and Ambac Financial Group Inc. are cut one level from AAA, and six times more for downgrades by two steps to A, Paul Fenner-Leitao wrote in a report published today. The estimates are based on banks' holdings of the outstanding $820 billion of structured securities covered by bond insurers, the report said.
``This is a huge amount, but the assumptions we use are also very aggressive,'' Fenner-Leitao said in an interview. The estimate was designed to show how bank capital could be affected if bond insurers are downgraded significantly, he said.....
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Leading banks were on Tuesday night under renewed pressure to bring forward plans to shore up the struggling bond insurers after Warren Buffett revealed he had offered to take over most of their best quality portfolios.
The billionaire investor told CNBC that he had offered to take over $800bn of municipal bonds guaranteed by three bond insurers – Ambac, MBIA, and FGIC – that are fighting to retain the triple-A credit ratings on which their business model depends in the wake of the subprime losses.
Mr Buffett’s intervention – which appears to have the blessing of Eric Dinallo, New York’s insurance regulator – rallied stock markets but poses a challenge for both the bond insurers and the banks exposed to their potential losses.
For although the proposal might prop up the US municipal bond market in the event of further downgrades – and thereby remove the threat of towns and states being unable to finance capital projects such as schools and hospitals – it does not relieve the pressure the bond insurers, or monolines.
“It is not clear that this type of transaction would enhance the ratings of the bond insurers,” Dick Smith, managing director at Standard & Poor’s, told the Financial Times. One bond insurer has already rejected the offer, Mr Buffet said. The companies would not comment.
However, the offer emphasised the pressure on the banks to find the necessary backing to avoid the risk of monoline downgrades.
http://www.ft.com/cms/s/0/7ea3b5f4-d...0779fd2ac.html (full article)
The billionaire investor told CNBC that he had offered to take over $800bn of municipal bonds guaranteed by three bond insurers – Ambac, MBIA, and FGIC – that are fighting to retain the triple-A credit ratings on which their business model depends in the wake of the subprime losses.
Mr Buffett’s intervention – which appears to have the blessing of Eric Dinallo, New York’s insurance regulator – rallied stock markets but poses a challenge for both the bond insurers and the banks exposed to their potential losses.
For although the proposal might prop up the US municipal bond market in the event of further downgrades – and thereby remove the threat of towns and states being unable to finance capital projects such as schools and hospitals – it does not relieve the pressure the bond insurers, or monolines.
“It is not clear that this type of transaction would enhance the ratings of the bond insurers,” Dick Smith, managing director at Standard & Poor’s, told the Financial Times. One bond insurer has already rejected the offer, Mr Buffet said. The companies would not comment.
However, the offer emphasised the pressure on the banks to find the necessary backing to avoid the risk of monoline downgrades.
http://www.ft.com/cms/s/0/7ea3b5f4-d...0779fd2ac.html (full article)
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Why insurers are rebuffing Buffett
Berkshire Hathaway's offer to the troubled bond insurers is presented as a rescue, but its terms may be too tough for the companies' shareholders to accept.
http://money.cnn.com/2008/02/12/news...ex.htm?cnn=yes
NEW YORK (Fortune) -- Berkshire Hathaway's latest foray into bond insurance is classic Warren Buffett. The Omaha billionaire has floated a proposal that is highly favorable to him and his shareholders - and excruciatingly tough on the companies he is targeting. But while the proposal has been widely described as a rescue, there are signs that Buffett's prey - including publicly traded Ambac and MBIA - aren't yet desperate enough to take the deal.
On Tuesday, Berkshire released a letter it sent to three bond insurers - understood to be Ambac, MBIA and closely held FGIC - offering to take over their municipal insurance obligations. Berkshire says the deal will allow the companies to focus on their other businesses, including the credit derivatives portfolios that have put the insurers under the close scrutiny of the ratings agencies.....
On Tuesday, Berkshire released a letter it sent to three bond insurers - understood to be Ambac, MBIA and closely held FGIC - offering to take over their municipal insurance obligations. Berkshire says the deal will allow the companies to focus on their other businesses, including the credit derivatives portfolios that have put the insurers under the close scrutiny of the ratings agencies.....
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Buffett Blames U.S. Policy for Sovereign Funds' Rise
By Josh P. Hamilton March 3 (Bloomberg) --
http://www.bloomberg.com/apps/news?p...d=aXUuA0yCJmX8
.....Offer Withdrawn
As defaults on mortgage-related securities climbed, Buffett offered to assume $800 billion of municipal bond obligations from MBIA, Ambac and FGIC Corp. in exchange for more than $9 billion in premiums. The offer was withdrawn after none of the companies accepted it, Buffett told CNBC today.
``We tossed our hat in the ring and they tossed the hat back,'' Buffett told the cable news network.
``He was just seeing if they were desperate enough to have to take the deal,'' said Charles Hamilton, an analyst at FTN Midwest Securities Corp. in Nashville, Tennessee. Hamilton rates the Berkshire stock ``neutral.''
Buffett said Berkshire took on more risk of losses from derivatives as global credit markets tightened, by selling financial contracts that pay buyers if high-yield bonds default. Berkshire has 94 of the contracts, up from 62 last year, he said.
The company collected $3.2 billion in premiums from the derivatives by the end of December, and paid $472 million in losses. In the ``worst case,'' Berkshire could be required to pay out as much as $4.7 billion more if bonds ``in various high- yield indexes'' default, Buffett said.....
As defaults on mortgage-related securities climbed, Buffett offered to assume $800 billion of municipal bond obligations from MBIA, Ambac and FGIC Corp. in exchange for more than $9 billion in premiums. The offer was withdrawn after none of the companies accepted it, Buffett told CNBC today.
``We tossed our hat in the ring and they tossed the hat back,'' Buffett told the cable news network.
``He was just seeing if they were desperate enough to have to take the deal,'' said Charles Hamilton, an analyst at FTN Midwest Securities Corp. in Nashville, Tennessee. Hamilton rates the Berkshire stock ``neutral.''
Buffett said Berkshire took on more risk of losses from derivatives as global credit markets tightened, by selling financial contracts that pay buyers if high-yield bonds default. Berkshire has 94 of the contracts, up from 62 last year, he said.
The company collected $3.2 billion in premiums from the derivatives by the end of December, and paid $472 million in losses. In the ``worst case,'' Berkshire could be required to pay out as much as $4.7 billion more if bonds ``in various high- yield indexes'' default, Buffett said.....
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Originally Posted by iTimmy
Buffets "genius" is just common sense, something most large institutions are incapable of utilizing for some reason.
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