3rd UPDATE: Buffett Offers To Reinsure Muni Bonds

Last Update: 2/12/2008 4:23:41 PM

(Updates throughout, adds comments from New York insurance commissioner, closing
share prices.)

By Lavonne Kuykendall
Of DOW JONES NEWSWIRES

Warren Buffett’s offer to the three largest bond insurers to take over their
municipal-bond insurance business through an $800 billion reinsurance contract
was met with little enthusiasm by the targets of his offer and investors, who
sent shares of the affected bond insurers plummeting Tuesday.

In an interview on CNBC Tuesday, Buffett said his Berkshire Hathaway Inc. (BRKA
BRKB) holding company made the offer to Ambac Financial Group Inc. (ABK), MBIA
Inc. (MBI) and FGIC Corp. The fee would be 1.5 times the remaining premiums that
the insurers hold in reserve during the life of the policies.

Buffett would manage those funds and take over full liability for the roughly
$800 billion in municipal bonds insured by the three companies.

“It didn’t sound like they were leaping for the door to say yes to us,” said
Buffett on the CNBC interview, adding that he plans to give the bond insurers 30
days to find a better deal. So far, one has rejected the offer and the others
haven’t responded, he said.

Buffett said he will agree to hold the offer for 30 days while insurers shop
around for a better offer, and would charge 1.5% of the premiums as a breakup fee
if bond insurers then backed out, Buffett said.

Buffett said he will put in an additional $5 billion of Berkshire Hathaway’s
funds, and won’t pay dividends, management fees or distributions for five years,
possibly giving New York Insurance Commissioner Eric Dinallo incentive to
pressure insurers to take the deal.

In a statement, Dinallo said he was pleased with the offer, which provides “an
option to protect municipal-bond issuers and investors.”

Hedge-fund investor William Ackman of Pershing Square Capital said during a
Tuesday conference call that the offer would essentially strip bond insurers of
their original municipal-bond businesses, but would stabilize the municipal-bond
industry.

“It calls the municipal-bond insurer’s bluff,” Ackman said. “If they are really
certain they are not going to lose” on the policies they have written on subprime
mortgage-backed securities, they should take the deal.

The deal leaves investors in subprime mortgage-backed bonds out in the cold, and
would put the bond insurers in a precarious position, said the chief executive of
a rival bond insurer.

Buffett’s offer “would take away more capital than it would provide in benefit”
to bond insurers, said Dominic Frederico, chief executive of Assured Guaranty
Ltd. (AGO), one of only two triple-A rated bond insurers to have mostly steered
clear of the riskiest of the subprime securities. “It is an offer that stabilizes
one end of the business, but creates a significant problem at the other end,”
Frederico said during his company’s fourth-quarter earnings conference call
Tuesday.

Shares of MBIA and Ambac both dropped more than 15% Tuesday with MBIA closing at
$11.50, and Ambac at $8.90.

MBIA and Ambac have said they expect to pay out more than $1 billion in claims on
their credit derivatives book of business, which insures risk on subprime
mortgage-backed securities.

Municipal bonds rarely see defaults, but have dropped in price as investors
question whether an insurance policy adds value, given insurers’ subprime woes.

Assured Guaranty’s Frederico said Tuesday that his company is also in discussions
with other bond insurers on the type of deal it did for Ambac. Earlier this year,
Assured Guaranty signed a deal with Ambac to reinsure a $29 billion portfolio of
municipal- and corporate-bond policies.

As to competing with Buffett, “I would be more than happy to stand by Mr. Buffet
and take whatever percentage of that deal he will be willing to share,” Frederico
said. “I think that will give you an idea of the value of that opportunity.”

A spokeswoman for MBIA declined to comment on the offer, while spokesmen for the
other two companies didn’t return calls asking for comment.

The credit markets also took a dim view of the bond insurers Tuesday.

The insurers’ credit default swaps, which are privately negotiated contracts
allowing investors to wager on firms’ creditworthiness, widened on the news,
indicating deteriorating confidence.

By mid-afternoon Tuesday, MBIA’s credit default swaps were 75 basis points wider
to 470 basis points, according to CMA DataVision. That means the annual cost of
protecting a notional $10 million of its bonds against default for five years is
now $470,000 versus $395,000 Monday. Ambac’s CDS widened by 50 basis points to
440 basis points. FGIC’s CDS widened by 1 basis point so that the cost of
protecting a notional $10 million of its bonds against default for five years is
now $1,950,000 up front and $500,000 annually, according to CMA DataVision.
Upfront fees are more associated with distressed credits than with
investment-grade companies.

-By Lavonne Kuykendall, Dow Jones Newswires; 312-750 4141;
lavonne.kuykendall@dowjones.com

(The Associated Press and Aja Carmichael and Romy Varghese contributed to this
report.)

(END) Dow Jones Newswires

February 12, 2008 16:23 ET (21:23 GMT)

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