Saturday, December 29, 2007

Buffett giveth and Buffett taketh away

The Wall Street Journal

December 29, 2007

Bond Insurers Brace for Buffett

Market's Major Players
Already Under Pressure
From Mortgage Fiasco
December 29, 2007; Page B3

Bond insurers put on a brave face in welcoming a new rival backed by Warren Buffett, even as investors dumped their shares on fears that a well-financed competitor would cripple their beleaguered business.

[Warren Buffett]

The Wall Street Journal reported1 Friday that Mr. Buffett, chairman of Omaha, Neb.-based Berkshire Hathaway Inc., has set up Berkshire Hathaway Assurance Corp. to sell insurance to cities, counties and municipalities seeking to sell bonds to finance public projects. That puts Berkshire in direct competition with some of the nation's biggest bond insurers, such as Ambac Financial Corp. and MBIA Inc. These companies' stocks have been pummeled in recent weeks on fears they will lose their coveted triple-A ratings because of exposure to mortgage-related bonds.

With Berkshire, which is well-capitalized and carries a triple-A rating, entering the business, the market position of incumbent insurers could be threatened. Shares of MBIA Inc., the nation's biggest bond insurer, were down 15.9% to $18.74 in 4 p.m. composite trading on the New York Stock Exchange. For the year, they are down 74%. Shares of rival Ambac Financial Corp. were off 13.8% at $25.12, and down 72% this year.

Nevertheless, officials from the incumbent insurers urged investors to look at the silver lining. Mr. Buffett's entry "is a significant validation of the valuable role our industry plays in helping public entities issue debt," said Willard Hill, chief marketing officer for MBIA.

Brian Moore, head of investor relations at Financial Guaranty Insurance Corp., a private bond insurer, said the new rival "highlights the fundamental strengths of the market place."

[MBIA stock chart]

Some analysts said the Berkshire bond-insurer, which will guarantee the interest and principal of only U.S. municipal bonds, won't take enough share to hurt the incumbents because the size of the market is so large. Ambac and MBIA insure a combined $700 billion in municipal debt, while Mr. Buffett's new venture is currently capitalized to write about $16 billion in new business, according to Steve Stelmach, an analyst at FBR Research.

Mr. Buffett told The Wall Street Journal he intends to commit "quite a bit of capital" to the business if it proves successful. Also, unlike the other bond insurers, Mr. Buffett's company won't insure structured-finance products such as collateralized debt obligations or any asset-backed securities, which require more capital. Such business comprises as much as half of the revenue for the other bond insurers and has carried much of the risk that has imperiled their credit ratings.

Separately, Berkshire reached a deal to buy a reinsurer from Dutch financial-services giant ING for $433 million.

--Steve Goldstein contributed to this article.

Write to Karen Richardson at karen.richardson@wsj.com2

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