Financial stocks rally because Warren Buffett is attempting a bailout of bond insurers. The nonsensical reasoning is reinsuring the municipal risk carried by the gang including MBIA and AMBAC is supposed to shore up their credit ratings, and they’ll be ok as a result.
Not so fast. A sensible person should pay attention to these points:
- Buffett is not touching the caustic CDO stuff that put the insurers in their precarious positions in the first place.
- It’s the nasty stuff now trading at pennies on the dollar with the highest risk of default, which means capital calls are still inevitable.
- Capital is in short supply at these insurers, and derivative counter-parties are hiding under rocks right now.
- At least one insurer has already said no.
Municipal deals were long the bread and butter of these bond insurers. At one time, they were producing record revenues and profits per employee. Then the insurers got greedy, backing structured finance transactions they had narry a clue about, and now they’re poised to tank. A shrewd person like Warren Buffett knows this, which is why he is going specifically after the municipal business. I’d suspect Buffett doesn’t care if these insurers fail – Berkshire would be in a perfect position to take over the direct lines which it is already reinsuring – the highly profitable end of the business. Peel off the last decent layer before the core finally rots away.
This move doesn’t relieve credit markets – it looks more like the fifth nail in the coffin.
UPDATE: The WSJ had the same idea, although they alude to Mr. Buffett as “the Wolf.” I don’t think there is any sheep’s clothing here – it’s just too obvious, and Mr. Buffett is simply looking to reward his shareholders. There is nothing inherently wrong with that.