Warren Buffett, the world’s third-richest man, boosted shares on both sides of the Atlantic yesterday after offering to prop up the beleaguered bond insurance market.
Mr Buffett offered to reinsure $800 billion (£408 billion) of local American government securities, assuming the insurance liabilities for “municipal” bonds underwritten by MBIA, Ambac and Financial Guaranty Insurance Co (FGIC), three of the biggest securities insurers.
His Berkshire Hathaway investment vehicle has set aside $5 billion for the plan. Mr Buffett told CNBC that one of the three monoline insurers had rejected his offer and he was waiting to hear back from the other two. He did not name the party that had refused.
The three bond insurers traditionally have underwritten American city and state government debt, but in recent years have moved into higher-risk assets such as sub-prime mortgage bonds. They guarantee the principal and interest payments on the securities that they underwrite in the event of a default by the issuer.
The three have already lost several billion dollars between them after a surge in defaults on home loans fed through into a jump in insurance claims on related bonds.
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JPMorgan has estimated that the handful of biggest bond insurers face an eventual collective loss of about $41 billion should mortgage defaults continue to rise.
The insurers are scrabbling for additional capital to ensure that they can meet their claims and maintain, or in some cases recapture their top credit ratings. Without these they will find it extremely difficult to write new insurance business and survive in the longer term. Their failure, or even further credit downgrades, would spark a new round of provisions or write-offs for the global banking industry related to their bond holdings.
Mr Buffett’s offer excluded the problematic sub-prime insurance policies and concentrated on the safe and profitable municipal securities.
However, his plan would free up an estimated $8 billion of much-needed capital at the three bond insurers because even such safe debt poses some risk to its underwriters and so requires capital to be set aside.
The plan helped to boost the stock market in general, and banking shares in particular. The S&P 500 gained 9.70 points, or 0.7 per cent, to stand at 1,348.85 at the close. The Dow Jones rose by 133.40, or just 1.1 per cent, to 12,373.40.
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Mr Buffett argued that his intervention would enable municipal bonds to keep their top AAA credit rating, which would avert a significant sell-off of these securities and prop up their values.
— In the latest attempt to push back the tide of mortgage defaults, a consortium of six banks, including Citigroup and Bank of America, has agreed to freeze the foreclosure process on some mainstream home loans by 30 days to give borrowers time to hammer out an alternative payment schedule with the lender.