Billionaire investor Warren Buffett announced Tuesday that he would help shore up three insurance bond firms by offering additional insurance on up to $800 billion in municipal bonds. The Wall Street Journal's David Wessel explains how bond insurers impact Wall Street and how Buffett's may help ease financial concerns.
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And to Jeffrey Brown for item two on the economic list of the day, Buffett to the rescue.
For the general public, bond insurance companies may be one of the more obscure puzzle pieces in the current financial turmoil. But on Wall Street, the plight of these businesses has been closely watched and had an impact on moving the markets on any given day, including today, when billionaire investor Warren Buffett offered to help three insurers of municipal bonds by offering a second level of insurance.
David Wessel, the economics editor of the Wall Street Journal, joins me now to help explain.
Well, David, they're called monoline insurers. Tell us, first, what they do. And how did they get in trouble?
DAVID WESSEL, Wall Street Journal:
These insurance companies are in what has been a very sleepy, profitable business. What they did was a municipality, a county, a state government would issue bonds.
Investors wouldn't want to do the homework to find out if the local government was good for the money, so the insurance company put their Good Housekeeping seal of approval on it, the "AAA" rating. The municipality would pay for that service, and they would be able to borrow at a cheaper rate.
It was a very nice business, but the companies got a little bit greedy. They saw a chance to make more money by diversifying into what they thought was a similar business: insuring securities that are linked to mortgages.
And as we know, that turned out to be a very risky business. And they didn't have enough capital set aside for being in such a risky business.
So this is all very much tied to the market, the housing problems that we've been hearing about for so long. Do we know the extent of the trouble that they're in?
Well, we don't really know the extent of the trouble they're in because we don't know how far house prices are going to fall.
But here's one example. One of the companies, known as MBIA, has already lost $714 billion on mortgage-backed securities. That compares to their losses over their previous 36-year history of around $900 billion.
And this company in the fourth quarter wrote down the value of their portfolio by over $2 billion. So the hole is very big, and they don't have enough capital set aside to stand behind these things, so they're in danger of losing their rating as "AAA" companies.
And nobody wants to buy insurance on a "A" bond from a company that's not "AAA," because what's the point of the insurance if the insurance company is more financially vulnerable than the county or local government that issued it?