Warren Buffett is finally moving to make some money from the nation's credit crisis by starting a new company that will insure debt issued by state and local governments. To make sure that he does indeed make money from the venture, he's promising not to make the same mistakes - charging too little and taking on too much risk - that have caused so many problems for long-time insurers like Ambacand MBIA.
Buffett tells the Wall Street Journalin a front-page article (his second this week) that Berkshire Hathaway Assurance Corp. (which starts business in New York State today) will stick to the basics, guaranteeing the repayment of bonds issued by governments for pay for things like schools and sewage projects. Unlike AMBAC, MBIA and other bond insurers, it won't go chasing higher returns by going after "structured products" such as bonds backed by mortgages. "We won't stray," Buffett tells the Journal.
UPDATE: CNBC'S BECKY QUICK REPORTED ON BUFFETT'S BOND INSURANCE MOVE ON TODAY'S POWER LUNCH. HERE'S THE VIDEO CLIP.
And Buffett says he won't make the mistake of charging too little for his bond insurer's services. Unlike Berkshire's Geico property/casualty insurerwhich stresses its low rates, Buffett's new venture will charge a premium for its likely triple-A credit rating, a price local governments will probably be willing to pay to avoid the now "wobbly" credit ratings of other insurers that backed mortgage-related bonds that "could lead to massive losses and significantly erode their capital."
Buffett tells the Journal that for years bond insurers didn't charge enough to justify the risks they were taking on because they were so interested in getting new business. "We felt that in many cases, the prices that people (bond insurers) were charging were inappropriate. As long as people (debt issuers) were willing to accept that, there was no point in trying to offer something else." Now that the credit ratings of the old-line bond insurers are in jeopardy, Buffett sees an opportunity. "It could be tiny, it could be very large. It'd be nice if it were large, but we're not pushing for that." (On Conde Nast's Portfolio.com, Felix Salmon makes makes the case for smaller rather than larger.)
Wall Street appears to see Buffett as a serious threat to the established bond insurers. In trading today (Friday), MBIA fell almost 16 percent to $18.74 and Ambac dropped close to 14 percent to close at $25.12.
Berkshire Hathaway, on the other hand, picked up 2.4 percent to close at $141,100, its first finish above $140k since Barron's made its 'Sell Buffett' call two weeks ago. Current price:
BUFFETT'S BEEN BUSY
It's been an incredibly active week for Buffett, who told us after the Christmas Day Marmon deal he had "finally earned" his salary for the year after "kind-of lollygagging around." It appears the opportunities from troubled times he's been waiting for are finally beginning to appear.
Also out today, news that Berkshire is paying about $435 millionfor the reinsurance unit of the Dutch bank ING , as troubled banks move to raise money by selling non-core assets.
All this activity is making it difficult for me to get to the top five countdown items in the Year in Buffett (I've already posted numbers 6 through 10), but I'm still aiming to get it done by New Year's Day. After all, I don't want anyone accusing me of lollygagging either.
Questions? Comments? Email me at email@example.com