The Wall Street Journal-20080213-Credit Crunch- Buffett Offer Won-t Solve Insurers- Woes- Bond Plan Lifts Market- But Approval May Show Sign of -Desperation-

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Credit Crunch: Buffett Offer Won't Solve Insurers' Woes; Bond Plan Lifts Market, But Approval May Show Sign of 'Desperation'

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Warren Buffett's plan to reinsure hundreds of billions of dollars of municipal bonds already guaranteed by struggling bond insurers helped lift the stock market -- but the offer isn't likely to improve the insurers' credit ratings or their future prospects.

While at least one firm already turned him down, Mr. Buffett effectively threw down the gauntlet, challenging others to put forth better offers.

"If they come up with anything better for themselves and for their holders of their insured bonds . . . they could go and take the other deal," Mr. Buffett told cable-news channel CNBC.

Mr. Buffett's plan, laid out in letters sent a week ago by Ajit Jain, the head of Mr. Buffett's insurance operations, to bankers for Ambac Financial Group Inc., MBIA Inc. and Financial Guaranty Insurance Co., offers to reinsure the companies' $800 billion of municipal bonds, for which they have already written policies. He would charge 1.5 times the remaining premiums that the insurers will earn on existing policies for his trouble.

"As far as we see it, it doesn't address their problems," says Thomas Abruzzo, a managing director at Fitch Ratings, who is responsible for bond-insurer ratings. "It's going to cost them a significant penny, money out the door, and net-net, the benefit of the offsetting reduction in risk may not help the companies at all," he said.

The offer from Mr. Buffett, the 77-year-old chairman of Omaha, Neb., holding company Berkshire Hathaway Inc., helped to push the Dow Jones Industrial Average up 133.40 points, as many investors viewed his move as supportive of the financial sector.

But shares of the bond insurers sank on the disclosure of the plan, as it became clear that taking up the Midwestern insurance salesman's offer to hive away their low-risk muni businesses would leave them with little more than risky, complex debt securities backed by deteriorating mortgage debt.

"Ambac feels that acceptance of the Buffett offer would show a sign of absolute desperation for a financial-guaranty company," said Michael Callen, interim chief executive officer of Ambac, in an interview. Ambac shares yesterday were down $1.58, or 15%, to $8.90 in 4 p.m. composite trading on the New York Stock Exchange.

MBIA and FGIC didn't respond to calls seeking comment.

MBIA, which recently raised at least $2.5 billion through offerings of debt and shares and investment from private-equity firm Warburg Pincus LLC, and Ambac and FGIC face potential downgrades of their coveted triple-A ratings by the credit-rating agencies. Both Ambac and FGIC were downgraded to double-A by Fitch Ratings, while Standard & Poor's also cut FGIC to double-A.

The three bond insurers, along with rivals Assured Guaranty Ltd., Financial Security Assurance Holdings Ltd., a unit of Belgian bank Dexia SA, and CIFG Holding, a unit of two French banking groups, insure about $2.4 trillion of debt, most of it issued by municipalities. In 2007, FSA, MBIA and Ambac were the top three insurers of municipal debt, writing policies for some $200 billion of bonds, according to Thomson Financial data.

The municipal-bond markets have been roiling in recent months as the value of bonds guaranteed by the bond insurers have fallen sharply in value.

"Within the municipal-bond market it would be a positive," says Dan Solender, head of the muni-bond investment team at Lord Abbett & Co. "The market is trading right now as if there is no value to the insurance, and if [Mr. Buffett] came in and reinsured them, then they would have their triple-A rating back."

Mr. Buffett's offer isn't egregiously priced, say some analysts. He said Berkshire would put up $5 billion to take on the liabilities. At the proposed fee, he would be aiming to make about $1 billion, or a 20% return, according to some analysts. Along with that, Mr. Buffett would essentially be narrowing the field of competition for Berkshire Hathaway Assurance Corp., the municipal-bond insurer he launched in December.

"I would submit that our proposal at the pricing levels we require is actually a cheap way for [the firms] to raise capital as compared to other alternatives," the Berkshire letter said.

The offer may be reasonable and compelling enough for regulators to pressure them into accepting. Mr. Buffett sent copies of his letters to Eric Dinallo, the superintendent of the New York State Insurance Department. Mr. Dinallo released a statement yesterday saying he was "pleased" that Mr. Buffett's plan "provides one more option to protect muni bond issuers and investors."

Mr. Buffett's pricing of the deal also could attract other cash-rich investors, such as private-equity and hedge funds, which have been sniffing around the sector. His plan might even inspire private-equity firm Blackstone Group LP, for example, which owns about a quarter of FGIC and has said it is continuing to consider its options.

Aside from Warburg, other investors have been ramping up their bets on the companies: Davis Selected Advisers LP, which in December reported a 5.1% stake in MBIA, yesterday reported a 14% stake in Ambac.

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Tom Lauricella contributed to this article.