US: Credit Market

Buffett's Offer Rejected by Bond Insurer Ambac With Wires

Troubled bond insurer Ambac Financial Group said it has rejected extra guarantees on municipal bonds offered by billionaire investor Warren Buffett -- and it may not be the first bond insurer to have done so.

Warren Buffett

The company said in a statement Tuesday that the reinsurance that Omaha-based Berkshire Hathaway is offering wouldn't be in the best interests of the bond insurer or all of its policyholders.

Buffett said Tuesday morning that one of the three bond insurers Berkshire offered reinsurance to had already said no, but he didn't say which one declined.

Ambac spokesman Peter Poillon says that his company was not the one Buffet was referring to and that it did not respond to Berkshire before issuing its statement.

Besides Ambac , MBIA and Financial Guaranty Insurance also received reinsurance offers from Berkshire

Seen as High Premium

Bond insurers are giving a cold shoulder to Warren Buffett's offer to back their municipal bond portfolios because of the high premium he's seeking and the fact that it wouldn't do anything to shore up the insurers' risky debt holdings.

Buffett told CNBC this morning that he has made a bid for the municipal bond portfolios of the insurers, but was rejected outright by one of them, and given a chilly reception by the others.

The bond insurers are cool to the idea because they're looking for a bailout of their entire portfolio, not the municipal bond holdings, which rarely fall into the default.

"Buffett's only taking the best assets," said Cynthia Cole, a portfolio manager at Allegiant Asset Management. "He's not reinsuring the riskier assets so the deal is really a last resort for the bond insurers."

The view that Buffett's plan might strip bond insurers of their best assets pushed their shares down sharply.

Bond insurers have lost billions of dollars by moving beyond their traditional business of backing muni bonds and insuring risky subprime debt. The losses could result in the insurers losing their coveted triple A debt rating, which is crucial for their business.

If a bailout of their entire portfolios can't be completed, these firms would likely bid out their muni bond portfolios to other firms and receive more than what Buffett has proposed. Buffett said he would charge them 50 percent more than the premium they're receiving.

"The cost is extremely high for the bond insurers," said said Cynthia Cole, a portfolio manager at Allegiant Asset Management in Cleveland. Also, reinsuring their best assets could leave the bond insurers with fewer resources to deal with expected losses from risky debt.

Still, Buffett's move was well received by investors, who feared that the bond insurers' difficulties will weaken credit markets that are already limping. Stocks rose sharply, and safe U.S. Treasuries dropped, implying that investors were more willing to buy risky assets.

"The Buffett news--plus the fact that the six major lenders are announcing a deal to help deliquent homeowners pay their bills--are acting as a nice elixir that is providing for a balance in the very short term," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research.

Buffett, chairman and chief executive of Berkshire Hathaway, told CNBC that not much can be done to rescue the bond insurers' repackaged debt known as collateralized debt obligations, or CDOs.

Ratings agencies have so far held off downgrading the bond insurers because it would be a politically sensitive move. If the bond insurers lost their triple A rating, states and cities that issue municipal bonds would see their own bonds downgraded because of questions about the insurers' ability to back up those bonds.

Banks could also be hit. According to Meredith Whitney, banking analyst at Oppenheimer, U.S. financial institutions could face fresh write-downs of as much as $70 billion if the bond insurers lose their top rating.

MBIA officials declined to comment. FGIC, whose owners include mortgage insurer PMI Group and private equity firms Blackstone Group, Cypress Group and CIVC Partners, did not return a call seeking comment.

--Reuters contributed to this report