Buffett muscles in on bond insurers

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The Independent Online

Warren Buffett has confounded those who hoped he would signal the bottom of the market and buy into financial companies by launching his own operation to take business from embattled bond insurers.

Mr Buffett's company, Berkshire Hathaway, has opened a business in New York to compete with so-called monoline insurers such as Ambac Financial and MBIA. The monolines have been hit hard by the credit crunch after straying from their core business of insuring local government bonds into covering debt products linked to sub-prime mortgages.

Analysts said a new AAA-rated bond insurer with the Berkshire Hathaway hallmark would win business from incumbent monolines because fears about their ratings have pushed up the prices of the municipal bonds they guarantee.

The 77-year-old investor has criticised the bond insurers for writing business too cheaply so that prices do not reflect risk. Now America's second richest person is seeking to capitalise on the uncertainty hanging over them to charge premium prices based on Berkshire Hathaway's rock-solid AAA rating.

"We felt that in many cases the prices that people were charging were inappropriate," Mr Buffett told The Wall Street Journal. "As long as people were willing to accept that, there was no point in trying to offer something else."

Berkshire Hathaway is sitting on a cash pile of more than $45bn (23bn) that Mr Buffett wants to invest. After a massive sell-off of US financial shares,market watchers had beenlooking for Mr Buffett to restore confidence in the nation's financial sector by buying into the stricken stocks. Those hopes were dealt a blow on Christmas Day when he announced theacquisition of Marmon, an unglamorous industrial company with steady cashflows. Berkshire will pay $4.5bn for 60 per cent of Marmon, owned by Chicago's Pritzker family, and will buy the rest within six years.

The move into bond insurance now sees him trying to pick off the monolines' core business, leaving them to their fate when it comes to structured credit. Mr Buffett said he had no interest in insuring those products: "We won't stray," he said. Berkshire Hathaway will apply to open the business in other states such as California and Illinois.

Mr Buffett, known as the Sage of Omaha, is known for his folksy style and occasional lectures on the dangers of unconstrained capitalism. But he is a highly opportunistic operator who spots ways to make money when competitors are weakened.

He said his company would charge higher rates than the monolines to reflect Berkshire Hathaway's high rating. Not to do so would risk the "moral hazard" of encouraging local governments to spend beyond their means, he told the Journal.

Shares of MBIA and Ambac fell heavily in afternoon trading yesterday on concerns that Mr Buffett's venture would put further pressure on the companies. Both insurers were down almost 14 per cent, with MBIA hitting its lowest point for at least a year.

American cities, counties and states sell bonds to fund public projects such as schools, hospitals and transport. In exchange for a fee, the AAA-rated insurers cover the issuing authority against default. But ratings agencies are reviewing the monolines' top-notch ratings because of the plunging values of the risky debt they have ventured into insuring.

Fitch, the ratings agency, put the AAA ratings of Ambac, MBIA and Financial Guaranty on watch for possible downgrade last month. The markets fear that downgrades for the monolines could cause a vicious spiral as prices of the bonds they insure fall, weakening the insurers still further.

The news of Berkshire Hathaway's expansion into bond insurance came at the same time as the company bought a closed reinsurance business from ING, the Dutch financial services giant, for about €300m (222m).

Mr Buffett's personal wealth is estimated at about $35bn, making him the US's second richest person after Bill Gates, chairman of Microsoft.

Berkshire Hathaway is based in Omaha, Nebraska, where Mr Buffett was born.