Tuesday, 12 February 2008

The Saviour of Omaha

Warren Buffet today made a huge announcement, that Berkshire Hathaway is going to effectively underwrite the monoline insurers. Complex though the situation is (and Robert Peston does actually do a good job of putting this in English on his blog) this is big news.

Much of the downturn in markets in February has been down to a great fear that these insurers would be downgraded and with it all the associated CDO's and bonds that the banks are sitting on. The net result would have been billions more write-offs for the banks and pushing the worst cases, like Citigroup and UBS, close to the edge.

Instead, into town comes America's greatest living businessmen, spots an opportunity and saves the day. No doubt he will make a pretty penny by taking on so much risk, however the very fact that such a conservative financier would do this has pushed the markets up hugely.

Perhaps a floor has now been added to the market collapse?


Anonymous said...

That wasn't my understanding of what the Sage is up to. The monolines have traditionally underwritten municipal bonds. Municipal bonds are generally considered pretty safe investments. The Sage has said "Oh look, you monolines have gotten yourselves in trouble because you started underwriting dodgy credit derivatives. You are desparate. You need money, and fast. I'll give you that money - IF YOU GIVE ME THE CREAM OF YOUR BUSINESS AND THEN I LEAVE YOU WITH THE CRAP!"

I'm not sure the monolines would regard Berkshire Hathaway as a saviour - more like a vulture.

idle said...

I agree with rs above; the Sage is no man's fool.

Whilst this might well avert the whole inventory of muni bonds becoming infected with sub-prime virus, I doubt it puts a floor under the stockmarket. A fellow in NY was trying to convince me today that the equity risk premium has moved out by two std deviations, and that the market is a screaming buy. I remembered that the Goldman in-house hedge vehicle fell to bits last year on a three (or was it four?) std dev move.

History is bunk.

Anonymous said...

Buffett is making an offer for the best part of their business...on terms favorable to him. He does this all the time (for example, Buffett offered to buy Long Term Capital Management's assets for pennies on the dollar and they rejected).

He said that one of the three monolines to which he extended offers rejected. The other two are considering, but their hubris will probably stay with them until the government bails them out.

The end result is the same - Buffett is going to corner the muni bund insurance industry.

James Higham said...

Yes but how many are going to do this osrt of thing and anyway, Omaha is a special case.

Anonymous said...

I have re-read this three times and haven't got a word of it.. So.

Is it still 3.00 pm on Sunday as agreed - and shall I bring those twelve cans of special brew?

CityUnslicker said...

Real/Idle - I completely agree, I don't mean that Buffett is doing anything other than making a killing. However, by saving the municipals and thereby the monolines it would prevent a further huge write-down of bank assets.

This IMO is a good thing, unless we are all wishing for armageddon.

CityUnslicker said...

Bret - we only needed one!

CityUnslicker said...

Mutley I can't drink special brew, make it tennants super and I am in.

Anonymous said...


I don't think that Buffett offering for the muni business will save the monolines. That is the healthy part of their business (the munis aren't defaulting...yet).

The reason that they are having problems is because they entered the ABS insurance business and charged premiums that REQUIRED default rates to remain at all time lows.

Offloading the good part of their business to Mr. Buffett will simply leave them with the bad part of their business (and some cash to keep operating in hopes that housing will make a reversal back toward the moon). Unless Bernanke pulls a rabbit out of his ass, those CDO, synthetic CDO, MBS, etc. securities will still kill the monolines.

That's why, when this was announced, one of them had already rejected his offer. They would have to be insane (or just that desperate for short term capital) to accept.

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