There’s an old adage, “Beware of Greeks bearing gifts,” but in financial circles it should read something like “Beware of Warren Buffett bearing cheques,” because when he does, he and his investment company, Berkshire Hathaway, usually make an awful lot of money at someone else’s expense.

And so it was yesterday when Buffett seemed to halt the rot on Wall Street (helped by a conditional plan to help some home owners facing mortgage foreclosures) and send the Dow up 133 points at the close.

The “Sage of Omaha” offered to take over $US800 billion of municipal bonds guaranteed by troubled US bond insurers who are struggling to retain their crucial triple-A credit ratings. And such is Buffett’s reputation in the US, investors chased stocks without really analysing the deal and at one stage the Dow was up over 200 points.

Buffett announced that Berkshire Hathaway had offered to back municipal bonds of Ambac, MBIA and FGIC totalling $800 billion, but by the end of the day the deal was looking a bit tatty as investors realised how much the proposal would benefit Buffett, leaving the insurers to struggle on with hundreds of billions of dollars in corporate and subprime mortgage-related bonds, which are not included in the offer and continue to sink in value.

The Financial Times quoted one US analyst as saying: “We remain doubtful about this deal.” Said TJ Marta, fixed income strategist at RBC Capital Markets, “he is only offering to take on the ‘good’ securities, or municipal bonds.”

“He is offering to take the fattest, most profitable part of their business,” said Jerry Bruni, president and portfolio manager at J.V. Bruni and Co. in Colorado Springs in Bloomberg.

“I can’t imagine why they would want to do that. If I were MBIA or Ambac, this does not sound like a good offer.”

“If you gave up your entire municipal business, that’s the book of business where the value in the companies is right now,” said Robert Haines an analyst in New York for CreditSights Inc., an independent bond research firm. He told Bloomberg: “You’d essentially be ceding that whole book to Buffett and what you’d be left with would be the book of business where all the troubles are.”

Buffett said he would charge premiums of 50 per cent above what the bond insurers are receiving from issuers on the policies, so the upshot of the deal is that if the three insurers accept his offer, Buffett makes billions (at least $US3 billion in fees) and his new bond insurer immediately becomes the industry’s major player with a 33% stake: all profitable business and none of the dodgy subprime rubbish. Sweet!

Buffett said in an interview that one unnamed insurer had turned down the offer, while the two others were still mulling it over. It’s no wonder.

Peter Fray

Get your first 12 weeks of Crikey for $12.

Without subscribers, Crikey can’t do what it does. Fortunately, our support base is growing.

Every day, Crikey aims to bring new and challenging insights into politics, business, national affairs, media and society. We lift up the rocks that other news media largely ignore. Without your support, more of those rocks – and the secrets beneath them — will remain lodged in the dirt.

Join today and get your first 12 weeks of Crikey for just $12.

 

Peter Fray
Editor-in-chief of Crikey

JOIN NOW