KEY POINTS:
Warren Buffett, the billionaire investor feted as the "Oracle of Omaha", has emerged as a key player in negotiations to restore order to the municipal bond market in the US, a vital source of funds for US local government and a key plank of the financial system that
has been threatened by the credit crisis.
In letters to many ailing "monoline" insurance companies, whose guarantees back hundreds of billions of dollars of municipal bonds, Buffett proposed taking over some US$800 billion ($1 trillion) of their bond insurance business.
His proposal came after talks with the monoline insurance industry's main regulator, Eric Dinallo, insurance superintendent for the state of New York, who has been trying to assemble a rescue deal for the leading companies including MBIA, FGIC and Ambac.
The future of MBIA and Ambac has been thrown into doubt because they face mushrooming losses in another part of their business, insurance for the complex derivatives linked to mortgages, whose value has collapsed and where defaults are rising.
Dinallo fears that the collapse of a monoline insurer, or even a downgrade to their credit ratings, could have ripple effects across the financial system. Already, Buffett said, municipal bonds are changing hands at a steep discount, as if investors did not have full insurance against a default. That threatens to raise the cost to local government of issuing more bonds in the future, adding to the financial difficulties municipalities may face if an economic downturn cuts tax receipts.
If muni-bond insurance became valueless, many risk-averse investors may be forced to sell the bonds, exacerbating the problem.
Buffett told CNBC television that his plan would "solve it in one stroke of a pen". His company, Berkshire Hathaway, would reinsure US$800 billion of municipal bonds, putting its gold-plated triple-A credit rating behind the bonds and restoring confidence.
At the moment: "The insurance in the market is not doing bondholders any good and is in some cases penalising bond investors," he said.
"Our proposal puts the municipals at the front of the line."
So far, he has had one response - a negative. Analysts said this was not surprising as it would mean ceding the solid part of the company's business to Berkshire Hathaway, while leaving the mortgage derivatives business where all the problems are located.
- INDEPENDENT