- Hedge Funds Take Early Lead in Warren Buffett's 'Big Bet'
- Amended Berkshire Hathaway Filing Indicates No Secret Stock Stakes at End of Q3
- Buffett's Wealth and Fame Hasn't Helped 'Warren' As a Name
- CNBC VIDEO: Warren Buffett & Bill Gates 'Walk & Talk' at Columbia University
- Warren Buffett to CNBC: Curbing Fed's Independence Could Lead to 'Mischief'
- Warren Buffett to Co-Chair Goldman Sachs Program to Help Small Businesses
- Warren Buffett: 'Reasonable Return is Good Enough' for Long-Haul Railroad Ride
- Warren Buffett's Berkshire Hathaway Almost Doubles Wal-Mart Holdings During Summer
- Warren Buffett's Berkshire Portfolio Snapshot Coming Later Today
- Warren Buffett to CNBC: 'I Haven't Bought American Express In Years'
RSS FEED
MOST SHARED
- 8 Retailers that Gain During the Holidays
- Get Paid Six Figures to Wear a T-Shirt?
- Dubai Spooks Investors But May Bring Buying Opportunity
- Finding the Holiday's Best Buys
- Dubai Fallout Is a Correction, Not Another Crisis: El-Erian
- Longer Lines, Fuller Carts This Black Friday
- Global Selloff From Dubai Woes Shows Signs of Winding Down
- Banks Play Down Dubai Exposure, Investors Still Wary
- The Good Entrepreneur Winner
- US Will Have to Tax Consumers: Economist
- Black Friday at Best Buy
- Strategists on Dubai: Avoid 'Rash Moves' Now
- Longer Lines, Fuller Carts This Black Friday
- Dubai Stock Market Fear Has 'Legs': Dennis Gartman
- Obama's Emission Reduction Pledge Paints Future for Autos
- Is Super Bowl Halftime Act Too Old?
- Surprising Options Trades in TiVo Shares
- EA Sports Hopes to Pump Up Sales Through Pop-Up Locations
- 8 Retailers that Gain During the Holidays
- Dubai Stock Selloff May Bring Buying Opportunity
- Dubai Fallout Is a Correction, Not Another Crisis: El-Erian
- Dubai's Debt Woes Signal New Era for Creditors
- Longer Lines, Fuller Carts This Black Friday
- Get Paid Six Figures to Wear a T-Shirt?
- The World's Biggest Debtor Nations
- Five Tips for Buying a Foreclosed Home
- Slideshow: Fantasy Christmas Gifts 2009
- EA Sports Hopes to Pump Up Sales With Pop-Ups
Warren Buffett Watch
Text Size 
 |
Steve Yeater / AP California Treasurer Bill Lockyer thinks Warren Buffett's Berkshire Hathaway is overestimating the risk of backing muni bonds, and is talking about having the state get into the business itself. (Photo from 2005 when Lockyer was California's Attorney General) |
Late last year, with the encouragement of New York's top insurance regulator Eric Dinallo, Buffett's Berkshire Hathaway launched a new bond insurer. Dinallo asked Berkshire to get into the game because he was worried that the financial troubles facing established bond insurers like Ambac [ABK
Loading...
()
] and MBIA [MBI
Loading...
()
] would make it harder for cities and towns to find willing buyers for their municipal bonds.
If bond buyers can't trust the insurance company backing the bonds, they'll demand higher yields to compensate for the increased risk they won't get their money back. Higher yields may be good for the buyers, but they increase the cost of borrowing money for perpetually cash-strapped municipalities.
Buffett says he'd been thinking about getting into bond insurance for years, but didn't because he thought the scramble to write new policies had driven down prices so low they didn't cover the risk being taken on by the insurers.
With Ambac and MBIA facing big losses in the wake of the sub-prime collapse, Buffett sees an opportunity to use Berkshire's strong financial position to back muni bonds, at what he sees as an appropriate (higher) price.
California's Treasurer Bill Lockyer sees it differently. He sees decades of history in which almost no muni bonds have fallen victim to a default. (MBIA and Ambac got in trouble not because they guaranteed munis, but because they branched into riskier areas, backing bundles of other loans, including those notorious sub-primes.)
Lockyer argues that the main reason muni bond buyers think insurance is needed at all in most cases is because the big credit ratings agencies don't evaluate state and local government debt the same way as corporate debt, artificially lowering credit ratings for those governments.
He's now proposing that some big California pension funds start their own muni bond insurer to compete with Berkshire, and tells Bloomberg and Reuters he won't do any business with Buffett, accusing Berkshire of supporting the two-tiered credit rating system.
While not exactly endorsing the corporate-government split, Berkshire's top insurance executive Ajit Jain did acknowledge in prepared testimony for a hearing by the House Financial Services Committee that "if the rating agencies level the playing field in terms of how they rate municipal versus corporate obligations, there will be little need for a financial guaranty insurance marketplace as we know it, because much municipal debt on a stand alone basis may not require the enhancement of the insurance to manage the costs of that debt."
That's one of the reasons Jain said he's "very concerned about the long-term viability of this business (bond insurance) in general and for us in particular."
Perhaps the bigger disagreement between Berkshire and California is on how risky muni bonds really are, an assessment that helps determine the 'right' price for bond insurance.
In his testimony, Jain argued against the 'no risk' view of muni bonds"
"There is hardly a sufficient history to conclude that there is a zero chance of loss in this business, although that is the assessment that gets reflected in the pricing. While there have been few municipal defaults in the past fifty years, Jefferson County, Alabama and Vajello, California, both having received publicity lately about possible defaults on their debt obligations, could just be the tip of the iceberg as municipalities are coming under increasingly unfavorable economic conditions, including reduced real-estate and sales-generated tax revenues and underfunded future pension and healthcare costs."
If California does gets its way, and the credit agencies do change their ratings system for government debt, Berkshire's "tip-toe" into the bond insurance business may not last all that long, leaving the state a clearer field to take on the very small, but potentially catastrophic, risk of widespread muni bond defaults.
Current Berkshire price: [US;BRK.A
Loading...
()
]
Questions? Comments? Email me at
- Gates Foundation to Sell Over Half Its Berkshire Hathaway Shares (March 21)
- Warren Buffett Returns to Daytime TV With 'All My Children' Cameo (March 20)
- Warren Buffett's Performance/Pay Ratio Gets Even Bigger (March 18)
- Exec Who Could Replace Buffett Says CEO Shift Unrelated to Berkshire's Succession Plans (March 12)
- Potential Buffett Successor Steps Down As Berkshire Utility's CEO (March 11)
- Warren Buffett "Gracefully" Says Goodbye to White Mountains (March 10)
- Barron's Spotlights Buffett's $4.5B Bullish Bet on Stocks (March 8)
- Warren Buffett Answers Your Emails: Download the Full CNBC Transcript (March 7)
- Warren Buffett Jokes to CNBC: I Passed Gates on Wealth List Because I "Spend Less" (March 6)
Data is a real-time snapshot *Data is delayed at least 15 minutes