Friday, December 28, 2007
By Christine Richard and Josh P. Hamilton (Bloomberg)
MBIA Inc. and Ambac Financial Group Inc., the two largest bond insurers, fell in New York Stock Exchange trading after billionaire investor Warren Buffett said he plans to start a rival company to guarantee municipal debt. MBIA, based in Armonk, New York, fell as much as 17 percent and Ambac dropped 15 percent, the most in two months. Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., told the Wall Street Journal his bond insurer opens for business today in New York. New York State Insurance Department Superintendent Eric Dinallo said the agency expedited Buffett's license request.
Berkshire, which gets half its profit from insurance, is challenging the bond insurers as they struggle to retain the AAA credit ratings that allow them to guarantee about $1.2 trillion of municipal bonds. The rankings of MBIA, Ambac and other guarantors are under scrutiny amid concern they don't have enough capital set aside to cover potential losses on bonds they insure that are linked to subprime mortgages. ``Investors might feel more comfortable investing in bonds insured by Buffett than those backed by an insurer with the legacy of the credit crisis hanging over them,'' said Matthew Maxwell, a London-based credit analyst at Calyon, the investment banking unit of Credit Agricole SA. Bond insurers ``are hurting, so now is a good time for Buffett to be getting into the market.'' Buffett, 77, told the newspaper that Berkshire Hathaway Assurance Corp. will also seek permission to operate in California, Puerto Rico, Texas, Illinois and Florida. David Neustadt, a spokesman for New York's insurance department, said Berkshire will get a license by Dec. 31.
Buffett didn't respond to requests for comment through spokeswoman Jackie Wilson. Calls to Liz James, a spokeswoman for MBIA, and Peter Poillon, a spokesman for Ambac, also weren't returned. MBIA, down about 74 percent this year, fell $3.05 to $19.22 at 12:15 p.m. in New York. Ambac, down 72 percent, dropped $3.85 to $25.29. Buffett's decision also indicates he is unlikely to bail out any of the bond insurers. Credit-default swaps on MBIA, which rise as perceptions of credit quality drop, rose 30 basis points to 610 basis points, the highest ever, according to CMA Datavision in London. Ambac increased 10 basis points to 620, the widest in three weeks. Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.
The bond insurance venture is Buffett's third move in a week as he seeks investments to absorb $45 billion in cash. Buffett said Dec. 25 that he will pay $4.5 billion to gain control of Marmon Holdings Inc., the Pritzker family's closely held collection of 125 companies and Berkshire today agreed to buy a reinsurance unit of ING Groep NV for about 300 million euros ($440 million). ``Having new entrants in the market to provide municipalities with options to enhance the credit of new bonds or to potentially provide enhanced credit for outstanding downgraded bonds is a very positive development,'' Dinallo said in a statement today. Berkshire Hathaway has AAA ratings from Fitch Ratings, Moody's Investors Service and Standard & Poor's and its guarantee would enable municipal bond issuers to cut the cost of financing everything from hospitals to schools to sports stadiums. Berkshire Hathaway is the largest investor in Moody's Corp., with a 19 percent stake as of Sept. 30.
`Vintage Warren Buffett'
``If Berkshire Hathaway Assurance knocks on the door of a municipal official, they all know who Warren Buffett is and they all know that the other major players in this business are suddenly suspect,'' said Frank Betz, who helps manage $800 million, including Berkshire shares, at Carret Zane Capital Management in Warren, New Jersey. ``It is such vintage Warren Buffett.'' MBIA, as well as Ambac and FGIC Corp. of New York, are trying to convince Moody's, Fitch and S&P that they deserve to keep their top ratings. Fitch has given MBIA and Ambac less than six weeks to raise $1 billion each or face losing their AAA ratings. Moody's and S&P earlier month placed MBIA's ranking on negative outlook. MBIA on Dec. 10 said it will get $1 billion from private-equity firm Warburg Pincus LLC to bolster its capital and Ambac took out reinsurance on $29 billion of securities it guarantees. ''MBIA and Ambac are probably going to be able to get through this and raise the capital needed to retain their AAA ratings,'' said Rob Haines, an analyst at CreditSights Inc. in New York. ``But it hurts them.''
Bonds sold by state governments make up about 33 percent of the insurance premiums collected by MBIA, the biggest of the monolines, and 50 percent of revenue for No. 2 competitor Ambac. The companies stumbled as they expanded beyond municipal securities into structured finance such as collateralized debt obligations, which package pools of bonds and loans and slice them into separate pieces. The insurers guarantee about $1.2 trillion of structured finance debt. Buffett, who has described derivatives as ``financial weapons of mass destruction,'' told the Journal he will focus on insuring municipal debt rather than CDOs. ``They're not seeing deterioration in the muni book,'' Haines said. ``All the real risk is in the structured book, which Buffett won't have.''
ACA Capital Holdings
New York-based ACA Capital Holdings Inc. is struggling to stave off delinquency proceedings after the value of the CDOs it guaranteed plunged. S&P cut ACA's rating by 12 levels to CCC after the company posted a $1.04 billion third-quarter loss. ACA Financial Guaranty Corp., a unit of ACA Capital, said this week it will seek approval from the Maryland Insurance Administration before pledging or assigning assets or paying dividends. Buffett has profited in the past from turmoil in the insurance business. Berkshire's after-tax profit from insurance underwriting soared to $2.5 billion last year from $27 million in 2005 after providing insurance coverage for coastal properties vulnerable to storms as some premiums quadrupled because of record U.S. hurricane losses. ``If Buffett smells an opportunity, his track record suggests there is one,'' said Georg Grodzki, head of credit research at London-based Legal & General Group Plc. ``Buffett seems to believe the market is viable and the bond insurer has a future.''
Ice Cream, Jets
Buffett built Berkshire into a $210 billion holding company by investing premiums from insurance subsidiaries including Geico Corp., the fourth-largest U.S. car insurer, until claims need to be paid. The company's operating businesses include ice cream company International Dairy Queen Inc., business-jet fleet operator NetJets Inc. and carpet maker Shaw Industries. ''What we really hope over time is to more or less break even on underwriting of insurance,'' Buffett said at the company's annual meeting in May. Berkshire's Class A stock reached a record $151,650 a share on Dec. 11, having surged about 27 percent this year. The shares rose $1,900 to $139,700 today. ``Be fearful when others are greedy, and be greedy when others are fearful,'' the billionaire chairman told Berkshire shareholders in his 2006 annual report released in March. ``Appropriate prices don't guarantee profits in any given year, but inappropriate prices most certainly guarantee eventual losses.''