Buffett's bond insurer Published: January 9 2008 02:00 | Last updated: January 9 2008 02:00
Before the emergence of sovereign wealth funds, Warren Buffett was everyone's favourite saviour. For the bond insurance industry at least, he still seems to have the magic.
Bond insurers are in trouble. MBIA and Ambac, for example, remain mired in uncertainty because of structured credit products they insured during the housing boom. Credit ratings agencies are hovering over them, with the constant menace of potential downgrades. So the New York insurance regulator took the initiative and called Mr Buffett's Berkshire Hathaway, hoping it would enter the market.
The regulator already knew Berkshire was interested - but it had not gone into bond insurance before because it thought the rates were too low. The result, within a month, was a brand new bond insurer, with, presumably, a shiny triple-A rating and no structured credit baggage.
That is good news for Mr Buffett. He should be able to take advantage of rising insurance rates and might even charge a premium to rivals MBIA and Ambac, because investors will not have to worry about black holes in the balance sheet.
It is also good news for the regulator, which has managed to attract new capital to the industry. It is less good for struggling incumbents whose ability to write profitable new business could be squeezed as they try to recover.
There is a question over whether it is desirable for the regulator proactively to single out a company and encourage it into the market. Presumably, the regulator has not been ringing round to find investors to inject capital into distressed bond insurers. But desperate times require desperate measures. As the credit squeeze continues to unfold, expect more behind-the-scenes moves from regulators to head off dangerous situations. In this case, perhaps luring in Mr Buffett will have the added benefit of encouraging more capital to follow his lead. Copyright The Financial Times Limited 2008
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