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Do you remember where I kept saying that the monolines weren't insuring, they were gambling? |
| Written by Reggie Middleton | |
| Friday, 28 December 2007 | |
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Berkshire Hathaway Assurance Corp. opens for business today in New York State, Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., said in an interview with the newspaper... Buffett, who said in October he was looking for investments to absorb $45 billion of cash, is challenging the bond insurers as they struggle to retain the AAA credit ratings that allow them to guarantee debt. The top rankings of MBIA, Ambac and other so-called monolines are under scrutiny amid concern they don't have enough capital for the $2.4 trillion of debt they guarantee.
``The monolines are hurting so now is a good time for Buffett to be getting into the market,'' said Matthew Maxwell, a London-based credit analyst at Calyon, the investment banking unit of Credit Agricole SA. ``Investors might feel more comfortable investing in bonds insured by Buffett than those backed by an insurer with the legacy of the credit crisis hanging over them.'' Buffett, 77, told the Journal he will also seek permission to operate in California, Puerto Rico, Texas, Illinois and Florida. Berkshire Hathaway has AAA ratings from Fitch Ratings, Moody's Investors Service and Standard & Poor's and its guarantee would enable municipal bond issuers to cut the cost of financing everything from hospitals to schools to sports stadiums. Buffett, who said he would charge more than existing financial guarantors, would present competition for Armonk, New York-based MBIA, as well as Ambac and FGIC Corp. of New York, as they try to convince Moody's, Fitch and S&P that they deserve to keep their top ratings. Suuuurrrree they do! Look here Fitch has given MBIA and Ambac less than six weeks to raise $1 billion each or face losing their AAA ratings. Moody's and S&P earlier month placed MBIA's ranking on negative outlook. MBIA on Dec. 10 said it will get $1 billion from private-equity firm Warburg Pincus LLC to bolster its capital and Ambac took out reinsurance on $29 billion of securities it guarantees. These companies with a mere $2 or $3 billion of capital are struggling to overpay for $1 billion in financing just to keep a rating they don't deserve. How in the world can compete against a $45 billion capitalized, conservative insurer with a sterling track record and reputation? These companies are done, don't even bother to stick a fork in. I told you they were done before, they are extra crispy now for the only new business for them to write is business that they shouldn't write. That Warburg Pincus investment in MBIA is money flushed down the toilet. `Mass Destruction' Bonds sold by state governments make up about 33 percent of the insurance premiums collected by MBIA, the biggest of the monolines, and 50 percent of revenue for No. 2 competitor Ambac. The companies stumbled as they expanded beyond municipal securities into structured finance securities such as collateralized debt obligations, which package pools of bonds and loans and slice them into separate pieces. Buffett, who has described derivatives as ``financial weapons of mass destruction,'' told the Journal he will focus on insuring municipal debt rather than CDOs. New York-based monoline ACA Capital Holdings Inc. is struggling to stave off delinquency proceedings after the value of the CDOs it guaranteed plunged. S&P cut ACA's rating by 12 levels to CCC after the company posted a $1.04 billion third- quarter loss. ACA Financial Guaranty Corp., a unit of ACA Capital, said this week it will seek approval from the Maryland Insurance Administration before pledging or assigning assets or paying dividends. Smelling Opportunity Buffett has profited in the past from turmoil in the insurance business. Berkshire's after-tax profit from insurance underwriting soared to $2.5 billion last year from $27 million in 2005 after providing insurance cover for coastal properties vulnerable to storms as some premiums quadrupled because of record U.S. hurricane losses. ``If Buffett smells an opportunity, his track record suggests there is one,'' said Georg Grodzki, head of credit research at London-based Legal & General Group Plc. ``Buffett seems to believe the market is viable and the bond insurer has a future.'' Yeah, I agree. It's the monoline derivative insurer that is DOA. Separately, Berkshire Hathaway agreed to buy the reinsurance unit of ING Groep NV for about 300 million euros ($440 million), the biggest Dutch financial-services company said in a statement today. Berkshire's Class A stock reached a record $151,650 a share on Dec. 11, having surged 25 percent this year. The stock had only three losing years since 1988. Buffett Starts U.S. Municipal Bond Insurer, WSJ Says (Update6)By Cecile Gutscher and Christine Richard  Dec. 28 (Bloomberg) -- Billionaire investor Warren Buffett is starting a bond insurer to take U.S. local-government business away from companies including MBIA Inc. and Ambac Financial Group Inc., the Wall Street Journal reported. Berkshire Hathaway Assurance Corp. opens for business today in New York State, Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., said in an interview with the newspaper. David Neustadt, a spokesman for the New York State Insurance Department, said Berkshire had applied for a license to insure bonds. He wasn't able to say if the license has been granted. Buffett, who said in October he was looking for investments to absorb $45 billion of cash, is challenging the bond insurers as they struggle to retain the AAA credit ratings that allow them to guarantee debt. The top rankings of MBIA, Ambac and other so-called monolines are under scrutiny amid concern they don't have enough capital for the $2.4 trillion of debt they guarantee. ``The monolines are hurting so now is a good time for Buffett to be getting into the market,'' said Matthew Maxwell, a London-based credit analyst at Calyon, the investment banking unit of Credit Agricole SA. ``Investors might feel more comfortable investing in bonds insured by Buffett than those backed by an insurer with the legacy of the credit crisis hanging over them.'' Buffett, 77, told the Journal he will also seek permission to operate in California, Puerto Rico, Texas, Illinois and Florida. Calls before regular business hours to Berkshire spokeswoman Jackie Wilson and Buffett's assistant Debbie Bosanek, both in Omaha, weren't immediately returned. Shares Drop MBIA, down 70 percent this year, fell 59 cents to $21.68 in early trading on the New York Stock Exchange. Ambac, down 67 percent, dropped 67 cents to $28.48. Berkshire Hathaway has AAA ratings from Fitch Ratings, Moody's Investors Service and Standard & Poor's and its guarantee would enable municipal bond issuers to cut the cost of financing everything from hospitals to schools to sports stadiums. Buffett, who said he would charge more than existing financial guarantors, would present competition for Armonk, New York-based MBIA, as well as Ambac and FGIC Corp. of New York, as they try to convince Moody's, Fitch and S&P that they deserve to keep their top ratings. Fitch has given MBIA and Ambac less than six weeks to raise $1 billion each or face losing their AAA ratings. Moody's and S&P earlier month placed MBIA's ranking on negative outlook. MBIA on Dec. 10 said it will get $1 billion from private-equity firm Warburg Pincus LLC to bolster its capital and Ambac took out reinsurance on $29 billion of securities it guarantees. `Mass Destruction' Bonds sold by state governments make up about 33 percent of the insurance premiums collected by MBIA, the biggest of the monolines, and 50 percent of revenue for No. 2 competitor Ambac. The companies stumbled as they expanded beyond municipal securities into structured finance securities such as collateralized debt obligations, which package pools of bonds and loans and slice them into separate pieces. Buffett, who has described derivatives as ``financial weapons of mass destruction,'' told the Journal he will focus on insuring municipal debt rather than CDOs. New York-based monoline ACA Capital Holdings Inc. is struggling to stave off delinquency proceedings after the value of the CDOs it guaranteed plunged. S&P cut ACA's rating by 12 levels to CCC after the company posted a $1.04 billion third- quarter loss. ACA Financial Guaranty Corp., a unit of ACA Capital, said this week it will seek approval from the Maryland Insurance Administration before pledging or assigning assets or paying dividends. Smelling Opportunity Buffett has profited in the past from turmoil in the insurance business. Berkshire's after-tax profit from insurance underwriting soared to $2.5 billion last year from $27 million in 2005 after providing insurance cover for coastal properties vulnerable to storms as some premiums quadrupled because of record U.S. hurricane losses. ``If Buffett smells an opportunity, his track record suggests there is one,'' said Georg Grodzki, head of credit research at London-based Legal & General Group Plc. ``Buffett seems to believe the market is viable and the bond insurer has a future.'' Separately, Berkshire Hathaway agreed to buy the reinsurance unit of ING Groep NV for about 300 million euros ($440 million), the biggest Dutch financial-services company said in a statement today. Berkshire's Class A stock reached a record $151,650 a share on Dec. 11, having surged 25 percent this year. The stock had only three losing years since 1988. Add this page to your favorite Social Bookmarking websites          Trackback(0)
Comments (2)
  written by Reggie Middleton, December 29, 2007
They may get an infusion, and they may not. I am notoriously bad at predicting the future. The question to ask is not whether they get capital or not but whether they get enough capital to ensure a profitable future. That, I doubt. The big municipalities started turning their back on these guys already, and now they actually have a truly capitalized competitor to go to.
As for warburg, I have to agree with Ackman on this one. I believe that Warburg will lose nearly all of their money on MBIA. That is a lot of propping to capitalize a company as small as MBIA to the level of of Bershire. Especially considering all of the structured finance problems MBIA has. It was reported that Buffet was trying to put $45 bilion to use, Warburg invested hald a billion with a story about another half. They potetentially only have another $44 billion to go:-) I did not study the pincus deal that closely, personally thus can't comment.
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To reiterate a previous question, will Ambac and MBIA get additional capital infusions in light of the Berkshire news? My guess is that they will, even though it would seem like a poor economic decision. The one possible exception to this is Warburg Pincus. If no other investors are willing to pump money in, then MBIA is guaranteed to get downgraded, which leaves Warburg nothing but downside. On the other hand, if Warburg somehow succeeds in propping MBIA up, their 16.1 million $40 warrants could pay off over the next seven years.
On the topic of the Warburg-MBIA deal, do you have any idea whether Warburg is required to purchase the additional $500M at $31 per share (if there are no other buyers) or would the purchase be based on market prices?