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By Jason Simpkins
BRK.A, BRK.B), offered yesterday (Tuesday) to assume responsibility for $800 billion of municipal bonds guaranteed by MBIA Inc. (MBI), Financial Guaranty Insurance Company, and Ambac Financial Group Inc. (ABK)., entrepreneur and chairman of Berkshire Hathaway Inc. (
"We offered to take over the liabilities for the whole $800 billion of these three companies for a premium that would be equal to, essentially, one-and-a-half times the remaining premium left over the life of the bonds," Buffett said in an interview with CNBC.
The upside for the nation's top three bond insurers would be the opportunity to retain their AAA-ratings. There is a growing concern that the companies won't have enough money to pay claims on the $2.4 trillion in assets they guaranteed.
That concern has contributed to an 8.4% drop in S&P 500 financials so far this year. MBIA, the largest bond insurer, has lost 80% of its value in the last year. Ambac has slumped 88% on concern that the companies will lose their AAA-credit ratings.
However, Buffett is only asking to take the most profitable, or safest, portions of the companies' municipal guaranty business. The offer excludes subprime-related securities, and collateralized debt obligations (CDOs).
"If you gave up your entire municipal business, that's the book of business where the value in the companies is right now," Robert Haines, analyst at CreditSights Inc., told Bloomberg News. "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 responded to that very concern by pointing out that the CDOs are going to pose a problem for the insurers no matter what.
"What this does, is it means that the municipals, in effect, get taken off the table and they know they're good and you've got $800 billion of those that are good," Buffett said. "It doesn't do anything for the CDOs, but I'm not sure anything is going to do much for the CDOs."
Buffett said one bond insurer already turned him down, and he hasn't yet heard from the other two.
The markets applauded the news with the Dow Jones Industrial Average soaring 220.95 points (1.81%) by 11:00am EST. The Standard & Poor's 500 Index climbed 21.2 points (1.56%) and the Nasdaq Composite was up 27.58 points (1.19%).
"It's another potential solution to some of the credit problems," Mark Bronzo of Security Global Investors told Bloomberg. "That's why the markets are responding well."
Bloomberg also reported that Bank of America Corp. (BAC), Citigroup Inc. (C), and four other U.S. lenders will announce a plan to offer a 30-day freeze on home foreclosures. It is expected to apply to prime borrowers as well as borrowers with poor credit histories.
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