Transcripts

Warren Buffet To The Municipal Bond Rescue

SUSIE GHARIB: A surprise offer from the oracle of Omaha to rescue three of the world's biggest bond insurers. Billionaire investor Warren Buffett revealed today he's willing to take on $800 billion in credit risk from MBIA, Ambac and Financial Guaranty Insurance. But his big offer comes with strings attached and is limited to re-insurance of municipal bonds. Erika Miller has more on why Buffett sees value in the troubled bond insurance business.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Warren Buffett is known for his shrewd business sense. Experts say his offer to become the insurer of last resort for $800 billion worth of municipal bond liabilities is another smart move. Buffett is willing to take on one of the safest, most profitable parts of the municipal guarantee business in exchange for a steep fee. Strategist Greg Peters says bond insurers probably can't afford to refuse the help.

GREGORY PETERS, CHIEF US CREDIT STRATEGIST, MORGAN STANLEY: I think it's a pretty astute, plausible offer, honestly. Obviously, Berkshire is a very smart firm, very opportunistic. And, honestly, it makes a lot of sense from his perspective and the monolines, on the other hand, might not have a lot of other choices. So, it seems like a reasonable offer.

MILLER: But Buffett says one bond insurer, who he declines to name, has already rejected his proposal. JPMorgan analyst Andrew Wessel predicts the other two insurers will likely do the same.

ANDREW WESSEL, BOND INSURER ANALYST, JPMORGAN: The problem with that is the guarantors don't really end up with anything other than getting out future earnings and having a lower insured balance of their portfolio. The problem is their portfolio post that transaction would still include all of the higher risk exposures, such as CDOs, mortgage-backed securities, et cetera.

MILLER: Buffett argues his offer will help bond insurers keep their coveted triple-A ratings. A loss of top status would make it harder for insurers to attract business and perhaps trigger widespread sales of muni bonds. But some analysts warn that bond insurers might actually hasten downgrades by accepting Buffett's offer.

WESSEL: If you take away the municipal bond business, it could actually have a negative capital effect on the financial guarantors, from a ratings agency perspective. It actually could lead to negative ratings action, which would obviously be a negative for the companies.

MILLER: What's clear is that Buffett's help would not come cheaply. The oracle of Omaha says he would charge bond insurers 50 percent more than the insurance premium they are receiving from issuers. Buffett admitted as much during an interview this morning, saying quote, when I go to St. Peter, I will not present this as some act that should entitle me to get in. Buffett may be doing it for the money, but analysts say his offer is good for the markets and could help stabilize the entire financial system. Erika Miller, NIGHTLY BUSINESS REPORT, New York.

GHARIB: Late today, one of those three big bond insurers turned down Warren Buffett. Ambac issued a statement after the close of trading, saying it would seek capital on its own. Ambac says, while it welcomes any constructive offers to deal with the current uncertain environment, it believes Buffett's offer would offer no financial relief to support its ratings.