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Buffet offers to hold the sword that the monolines will impale themselves on...

Written by Reggie Middleton
Tuesday, 12 February 2008
Why in the world would the media (rhetoric question) report the street rallying when Buffet offers to buy the only thing keeping monolines afloat? He is effectively holding the sword labeled monoline hari kari. From Bloomberg : " Berkshire would put up $5 billion as capital for the plan and is offering to insure the municipal debt for 1.5 times the premium charged by the bond insurers to take on the guarantee. The insurers could accept the offer and back out within 30 days for a fee, Buffett said." Of course, management (at least the ones with any gray matter left) are saying thanks, but no thanks. Wait a minute, though. They say that CDOs have value and the mark downs are a temporary thing that will amortize and revert back to par or above by maturity. If that was truly the case, and you are strapped for capital that no one appears to want to give to you, Buffet's offer makes plenty of sense. After all, he is willing to pay you 2/3rds of what you paid for this low growth risk, but you get the capital that you seek so desperately and you get to capitalize on those structured products that you feel the market undervalues so foolishly. That 's a damn good deal for someone who is scrambling for money. Then again, that's only if you really believe your own structured product story. I don't think they do. The only stock that should be rallying is Berkshire Hathaway. Outside of potential for Buffet's stock holders, nothing has changed. Even the Buffet equity potential has not changed much. We all knew this is what he wanted to do - take advantage of the mistakes that the monolines made with very little risk. Add this page to your favorite Social Bookmarking websites Set as favorite Bookmark Email This Hits: 1696 Trackback(0) TrackBack URI for this entry Comments (5) Subscribe to this comment's feed If I were Dinallo, I would written by Reggie Middleton, February 12, 2008 strongly recommend the most distressed insurers take Buffet's deal. It effectively forces the investors of the insurers to pay for the mistakes of the insurer's management, while rescuing the policyholders. A win-win-lose solution. The only loser would be the insurer and their investors. +1 ... written by Everett Puri, February 12, 2008 MBI in the most recent offering doc states " approx 2/3 of our Q4 $3.4 billion mark to market loss ...resulted from wider spreads for CMBS and RMBS collateral and the remaining 1/3 was primarily due to downgrades of the collateral ....we continue to believe that the balance of the mark to market losses are not predictive of future claims and .... the cumulative marks should reverse over the remaining life of the insured credit derivatives." So, as you say they still believe. Buffet action may allow regulator to separate and save. It is logical. +1 ... written by Reggie Middleton, February 12, 2008 [I modified this comment due to an error in misreading the original story, pointed out by moody's zero] They don't truly believe the structured products have much value. If they did, they would jump on Buffet's deal. He is offering 1/3 less than they paid for their risk (effectively underpaying for it), and the market is severely undervaluing their structured product portfolio (again, if you believe their story) which will allow them to arbitrage this alleged mispricing. +0 Buffett offering 50% or GETTING 50% more paid to HIM?? written by Jon Pearlstone, February 12, 2008 Reggie am I reading the Bloomberg quote correctly. Buffett RECEIVES 1.5x the premium paid -- he does not pay--he simply collects some huge payment from the monos then agrees to put up 5 Billion to protect against future claims. You said he is offering to pay 50% more for their risk--that does not read that way to me--can you clarify? +0 ... written by Reggie Middleton, February 12, 2008 Your right, I somehow read it backwards. I will correct it. +0 Write comment Name Email Website Title Comment smaller \| bigger Subscribe via email (Registered users only) I have read and agree to the Terms of Usage. Write the displayed characters
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