Saturday, February 16, 2008

why criticize Buffett for offering to insure municipalities?

Over the last week a number of less than financially focussed friends discussed concerns about municipal bond insurers and repeated mainstream media accusations that Warren Buffett was looking to chery pick the best investments by offering to insure municipal bond issuance.

I was struck by the ridiculousness of mainstream media moral condemnation of buffett - they accused him of trying to pick-up the best investments available on wall street while their insurers were in distress.

I found the whole thing remarkably illustrative of the general lack of economic and financial education amongst mainstream journalists.

There's a nice article in the February 18th issue of Business Week that analyzes the municipal insurer crisis. Their oppinion, many municipalities have such high credit ratings they may not need municipal insurance at all.

The backstory is that several municipal bond insurers - the companies that insurer bond issuances by local government (from default) - diversified into CDOs. CDO's are collaterized debt obligations - the bad boys of the shakey credit markets. About 1/3 of debt insured by the muni bond insurers industry is asset backed debt, which includes CDOs. The other 2/3s are municipal debt.

The question is: why malign Buffett for offering to insure municipalities' debt? He's adding liquidity to a market that's been tarnished and allowing more municipalities to obtain insurance than the current market would normally be able to absorb (due to several insurers racking up large CDO related offers).

Buffett has found the perfect moment to strike and start an insurance company while some of his competitor's have been knocked out of the ring.

It's a sounds idea and frankly a very positive service to the economy, unworthy of the criticism that he's snapping up the safest debt at a discount.


1 comment:

mOOm said...

He offered to reinsure the muni bonds they insure for 150% of the premia that they have been collecting. This leaves them with all the crap stuff they have been insuring which has caused them the problem in the first place. The offer can't be serious. It's meant to highlight that Berkshire Hathaway has now entered the muni bond insurance market as of last month and if the regulators want they could shut down all these existing bond insurers and pass the business on to BRK. OK by me as a BRKB shareholder :0