The price of the 30-year government bond tumbled yesterday after billionaire investor Warren Buffet offered to reinsure municipal bonds insured by MBIA, Ambac and FGIC for a princely sum of 1.5 times the premium the insurers receive from issuers to insure already highly-rated municpal bonds. I would like that deal too if I were Mr. Buffett. One and a half times the normal premium to insure bonds that have as much chance of defaulting as I do of becoming the King of England. Mr. Buffet specifically stated that he (Berkshire Hathaway) will not reinsure CDOs. This probably means more writedowns for banks and brokers. This should not be surprising to my readers.
The monoline bond insurers have rebuffed Mr.Buffets offer. Interim Ambac CEO Michael Callen stated:
"Ambac feels that acceptance of the Buffett offer would show a sign of absolute desperation for a financial-guaranty company"
The Wall Street Journal reports that MBIA and FGIC offered no response to calls seeking comment.
Fitch Managing Director Thomas Abruzzo comented:
"As far as we see it, it doesn't address their problems."It's going to cost them a significant penny, money out the door, and net-net, the benefit of the offsetting reduction in risk may not help the companies at all."
Clients concerned about their municipal bonds there is a lesson to be learned here. Warren Buffett is willing to take on the risk of reinsuring municpal bonds because he knows there is very little risk in doing so. Why is he asking such an exorbatent price to guarantee municipla bonds? First, there are the costs associated with engineering such a scheme (legal fees etc.). Secondly, this is a free market. Suply and demand rules. Mr. Buffett is asking the what he thinks is worthwhile compensation for undertaking such a plan (he is also asking what he thinks he can get). This is all fine and dandy, but it is a bit odd coming from someone who preaches a modified form of socialism. Could this be a case of a double standard?
The Wall Street Journal's Ahead Of the Tape column discusses how it may be the auditors which force firms to accurately price their opaque securities (when possible). The Journal reports that it was AIG's auditor, Pricewaterhouse Coopers, which forced the insurer to "properly" value its exposure to subprime mortgages.
If auditors take a hard stance on accurately reporting subprime exposure, more writedowns could follow. We believe that no auditor wants a repeat of Arthur Andersen / Enron. This could be compounded if financial institutions are forced to place more SIVs and CDOs on their books.
No comments:
Post a Comment