Can Warren Buffett play the bond market?

by Ryan Caione, February 19th, 2008, 6:53 am

That imp Warren Buffett is at it again. America’s favorite financial guru (and the mastermind behind legendary Berkshire Hathaway) has offered a helping hand to that most mundane and arcane of sectors, the bond insurers. The companies no one hears about until something goes wrong — and things are going quite wrong. Admit it, you probably were only vaguely aware of the existence of the likes of Ambac, FGIC, and MBIA before they started waving earnings red flags and politicos started testifying to Congress about their travails. Yes, the subprime mortgage tsunami has crashed upon their shores, rending into junk billions of dollars worth of mortgage-related investments. At stake not only are the bond insurers’ sterling AAA credit ratings, but their chief executives’ jobs and the companies’ very existence.

So here comes Mr. Buffett astride his white steed to their rescue. Except he isn’t offering to assume the risk of all those festering mortgage bonds. Instead, he is proposing to reinsure some $800 billion of policies from Ambac, FGIC, and MBIA that guarantee the principal payments and interest on municipal bonds, which are much, much more stable investments. The bond insurers would still be saddled with their deteriorating mortgage investments, but would gain billions in liquidity. Cynics suggest that Buffett is trying to weaken the competition so he can corner the lucrative municipal bond insurance market. Indeed, in December a new Berkshire Hathaway unit received the regulatory green light to insure mortgage bonds in New York and is seeking similar licenses in other states. And reportedly, the man himself has even jokingly confessed that his supposed bailout of the bond insurers isn’t going to get him into heaven.

FGIC isn’t falling for it. The Wall Street Journal reported Friday that the company would rather cleave itself in two than be bamboozled by the Oracle of Omaha. Ambac has also rebuffed him, and MBIA says it’ll do just fine on its own, thank you. Trouble is, if the bond insurers can’t get their own houses in order, insurance regulators might step in and impose on them a deal similar to the one Buffett has proffered.