Billionaire Buffett Offers to Help Insure Municipal Bonds

DAVID WESSEL: Well, the reason everybody is upset about this is because, if these companies are downgraded, then all the banks and other investment companies that own these securities that they've rated will have to take a hit. And it may make them less willing to lend.

So there's been this big effort, led in part by the insurance commissioner in the state of New York, Mr. Dinallo, but with help from the Federal Reserve Bank in New York and the Treasury, to come up with some kind of rescue plan for these companies.

What Mr. Buffett did is come through today and say, "You have a lot of responsibility to guarantee municipal bonds. I will take over $800 billion of those bonds, guarantees. I'll take a big chunk of your business for a profit."

He made no secret that he's doing it because he thinks it's a good business. It's not a favor to the system; it's not charity. He's willing to take about two-thirds of their municipal bond insurance business and say, "I'll take that on." He's trying to build a business here.

Now, some of the companies said, "Gosh, thanks, but no thanks," because he's offering to take their good business and they're trying to figure out how to finance their bad business. And he isn't offering to take that.

JEFFREY BROWN: Well, explain that a little bit more. So, I mean, as you said he was very clear today when he announced this that this was for him a way of making some money and maybe helping out the system at the same time. But this is the municipal bonds only that he's talking about.

DAVID WESSEL: That's right. They have insured about $1.2 trillion in municipal bonds. He said, "I will take responsibility for $800 billion of that, and I will charge you a premium equal to 50 percent more than the premium you're collecting."

And he's willing to put -- he has a lot of money. He's willing to put $5 billion of his money into this business. He'd like to be in this business. He is not offering to bail out the companies, and he is not offering to take responsibility for their really risky securities, these subprime and other mortgage-backed securities.

JEFFREY BROWN: And so where would that leave those riskier investments?

DAVID WESSEL: Well, these companies would be able to -- the system would be a little safer, because these municipal bonds would be insured by a rich person, but some other plan would have to be found to raise capital for these companies or some other investor who's willing to take over the responsibility for insuring these more risky securities.

JEFFREY BROWN: Now, you said that one company rejected it already. I think the others are looking. What was the response, the broader response on Wall Street and among people who are worried about what's going on more broadly?

DAVID WESSEL: Well, as you noted earlier in the program, the stock market liked this, because it is very worried about the number of shoes that are dropping. And any shoe that can be kept on the feet of the insurance companies, if you will, is one less thing to worry about.

So the stock market overall rose, but actually the stocks of these companies fell, because this may not be a great deal for the investors in these companies. It may be a good deal for the system as a whole and for Warren Buffett, but not to the people who own stock in MBIA and the other companies that are in this business.

JEFFREY BROWN: Is part of the good reaction just based on the fact that it is Warren Buffett who is stepping in here?

DAVID WESSEL: I'm sure. Warren Buffett always carries a certain cachet, but I think also there's a sense that, how will we know when this thing, broadly defined, is over?

And how we know it's over is when really sophisticated investors say, "OK, the prices have fallen so low that they're such a bargain that I have all this money I'm going to come in and buy them." And to the extent that big investors will come in and buy mortgages, or take over insurance responsibilities, or buy land or buy houses, people will begin to feel maybe the end is at hand, that we've hit bottom.

And so I think one reason is it's just good to know that Warren Buffett thinks there's some money to be made here. If more people do that, maybe the crisis will come to an end.

JEFFREY BROWN: I noticed, though, because I was reading the interview he did with CNBC earlier today when he announced this, he didn't seem to know where the bottom was for those worrisome loans. He said flat out that he wasn't sure where it was going after all.

DAVID WESSEL: That's absolutely right. I mean, I wrote a column in the Wall Street Journal that said if Ben Bernanke, the chairman of the Federal Reserve, could know just one thing, it would be, how much farther and how much longer will home prices fall?

So much of the economy and Wall Street is in a mess because they just don't know how much worse it's going to get.

DAVID WESSEL: That's a good question. One thing is that, if municipalities are unable to get insurance, it may affect their ability to borrow, to build roads and schools and sewage plants and stuff like that.

So a lot of us are taxpayers. We have an interest in making it possible for our municipal governments, county governments, state governments to borrow.

But the second and probably broader thing is that if these companies -- the whole system has become vulnerable to the weakest links. And if these companies get in trouble and banks and investment banks have to take a big hit, they're going to be less willing to lend to all of us, to businesses and consumers.

And we're at a point in the economic cycle where we don't need them to have any more reasons to be reluctant to lend. So to some extent, if we can fix this problem, it may prevent another problem down the road.

JEFFREY BROWN: All right, David Wessel of the Wall Street Journal, thanks a lot.

DAVID WESSEL: You're welcome.