Trader Talk

Markets Debate Buffett's Bond Offer (Good And Bad)

The Buffett offer to take over the insurance liabilityof the municipal bond part of the mortgage insurers portfolio is causing a lot of debate on the Street.

The general conclusion is, good for municipal bond holders, good for furthering a solution to another piece of the credit mess, but bad for the bond insurers, and the market is reflecting that in the down prices of the insurers today.

The reason it is not a good deal for the bond insurers? This is no bail-out. The insurers are left with risky CDOs, the counterparty risk remains for banks and brokers, and--most important of all--this offer may not prevent a ratings downgrade, even though it would free up some capital.

So it's fairly clear the companies do not want this deal. Still, if the ratings are downgraded, Buffett may still make this deal happen because it's likely a solution by the regulators would be sought and he would be brought in to "save" the muni part.

The best hope for the bond insurers at this point appears to be some kind of bail-out by the banks and brokers, who hold significant counterparty risk. But where is the offer? Nothing yet.

Questions?  Comments?