Wednesday, 05 March 2008 00:00

Buffet shares snippets of the monoline and muni insurance deal

The is a very interesting interview that anyone invested in the
major monolines should read. Later on, I will post what looks like an
indication of Fitch getting tough with MBIA.

From CNBC :

We also have talked an awful lot about what's been happening with the
bond insurers. You made a deal that you brought up on our air a couple
of weeks ago, where you said you would take over the municipal bond
portfolios for Ambac, for MBIA, for FGIC if they came to you. Did you
hear from any of them? Did any of them take you up on that deal?

Well, we heard from them, but we tossed our hat in the ring, and they
tossed the hat back. But fortunately--it's been fortunate for us,
because we've been writing business that they insured, and we're
getting a far better rate than we offered to take it over from them. So
here--we've written 206 transactions in the last three weeks, and we
have been paid an average of 3 1/2 percent to take on business that
they wrote at 1 percent. But we don't pay until they go broke. So in
effect, the municipality has to quit paying, and over here I've got the
bond insurers. And it's just--it's the three you named plus a few
others. And they have to go broke, and then we pay. So we're getting
paid 3 1/2 percent to be in a secondary position when we offered to do
it for 1 1/2 percent in a primary position.

QUICK: And we're still talking about municipalities.

BUFFETT: Municipals.

QUICK: We're not talking about CDO business or any of the other portfolios.

BUFFETT: Oh, no. We're not--no. These are all A-rated or better municipals insured--202 of the 206 are insured. And we've received $69 million of premiums for two billion of a par amount. The original insurer received about 20 million. And they're still primarily on the hook. So our price was all wrong.

QUICK: Why would this happen? I mean, why don't they come back to you at this point and say, `We'll take that 1 1/2 percent deal'?

BUFFETT: Well, it--they don't have much motivation to do it from the directors' level or the shareholders' level, and what they're hoping for is new money, you know, and I hope for new money too. I mean, who doesn't? And they may get it. In fact, MBIA has gotten a fair amount of money. But they--in the end, they--they're not really--they really haven't, in a sense, totally faced up to the mistakes that they've made.

QUICK: You say that they hope--you hope they get new money, as well, put in?

BUFFETT: Well, if they get new money, as long as they stay solvent we can't pay a claim on this. We get $69 million, there's no way we pay a claim because they are primarily liable if the municipalities go broke. Now, municipalities do go broke, or tax exempt issuing entities. People say it's risk free. Vallejo, California, town of 120,000, last Thursday the city council was scheduled to vote on going into Chapter 9 and going broke. And the thing about municipalities, if they decide it's the easier way to go, it could be contagious. Now, I don't think that necessarily will happen. It's unlikely to happen, but it's not impossible it would happen.

Last modified on Wednesday, 05 March 2008 00:00


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