Buffett's bond insurer gambit no burst of altruism

NEW YORK Wed Feb 13, 2008 9:00am EST

Warren Buffett, chairman and CEO of Berkshire Hathaway, listens to a question during testimony at a Senate Finance Committee hearing about ''Federal Estate Tax: Uncertainty in Planning Under the Current Law'' on Capitol Hill in Washington, November 14, 2007. REUTERS/Jason Reed (UNITED STATES)

Warren Buffett, chairman and CEO of Berkshire Hathaway, listens to a question during testimony at a Senate Finance Committee hearing about ''Federal Estate Tax: Uncertainty in Planning Under the Current Law'' on Capitol Hill in Washington, November 14, 2007.

Credit: Reuters/Jason Reed (UNITED STATES)

NEW YORK (Reuters) - Warren Buffett's offer to support $800 billion (400 billion pounds) of municipal bonds isn't a bail-out. Nor is it a fresh burst of altruism for a man donating 85 percent of his billions to charity.

It's a way for his insurance and investment company, Berkshire Hathaway Inc (BRKa.N) (BRKb.N), to rake in even more profits.

"When I go to St. Peter I will not present this as some act that should entitle me to get in," Buffett said on CNBC television. "We're doing this to make money ... If you put up $5 billion, you ought to make some money."

That's how much capital Buffett said he offered last week to guarantee municipal bonds now backed by MBIA Inc (MBI.N), Ambac Financial Group Inc ABK.N and FGIC Corp. He said he would insure the bonds for 50 percent more than the insurers charge, an amount that analysts said was high.

Buffett's offer was also notable for what it excluded -- risky debt, including securities tied to subprime mortgages, that has caused billions of dollars of losses for bond insurers. He said one insurer rejected his proposal, without identifying it.

If Buffett steps in, he could stabilize credit markets fearful of existing insurers losing their "triple-A" credit ratings.

This could make it tough for them to win business, and trigger widespread sales of municipal bonds, driving up states' and cities' borrowing costs and thus hurting taxpayers.

"To the extent (Buffett) has been a white knight on occasion, it has been driven by the opportunity to make a whole lot of money," said Whitney Tilson, managing partner of T2 Partners LLC in New York.

"I think the reason he went public is he is offering a very good deal for society and the financial system, but a very bad deal for MBIA and Ambac," Tilson added. "He's offering only to cherry-pick the good business."

Tilson said T2 invests $140 million of hedge fund capital, and that its largest investment is Berkshire. He said T2 is selling MBIA and Ambac "short," betting on a further decline.

GOOD FOR BERKSHIRE, AND COUNTRY?

Omaha, Nebraska-based Berkshire is a $214 billion insurance and investment company that owns more than 70 companies, as well as stocks of such brand-name companies as American Express Co (AXP.N), Coca-Cola Co (KO.N) and Wells Fargo & Co (WFC.N).

It made $10.27 billion from January to September last year, and Berkshire shares are up roughly a quarter since the global credit crunch accelerated early last summer.

Berkshire created its own bond insurer, Berkshire Hathaway Assurance Corp, in December, and is seeking to expand nationally. Experts said Berkshire's $47 billion cash cushion and triple-A ratings gave the new insurer instant credibility.

"Buffett is trying to capture a huge piece of the market share because (he sees) weakness in the whole sector," said Robert Haines, an insurance analyst at CreditSights Inc.

Several rivals ran into trouble after seeking more profit by covering a variety of structured products -- which have plummeted in value -- rather than keeping their focus on bonds used to finance such things as hospitals, roads and schools.

"Buffett is doing something good -- yes he's doing it for money, but it's good for the country," said Mohnish Pabrai, managing partner of Pabrai Investment Funds. "It affects portfolios across the board, even in the tiniest towns in Nebraska and Wyoming."

Pabrai said he owns Berkshire stock personally, but sold his Irvine, California-based firm's shares late last year after they had risen about 50 percent.

PROFITS FROM HOUSING

With an estimated $52 billion net worth, Buffett's reputation as an investor is legendary, and his capacity to speak in homely terms can appeal to ordinary investors.

The 77-year-old burnished his image in 2006 when he agreed to donate much of his net worth to the Bill & Melinda Gates Foundation and four family charities.

Buffett has ridden in, or been available, to help firms under stress in the past.

In 1991, he took over Salomon Brothers after a scandal involving fake bids at U.S. Treasury auctions, though the investment itself did not pan out. Seven years later, he came close to helping bail out the Long-Term Capital Management hedge fund, though banks and regulators ended up doing that.

T2's Tilson likened Buffett's latest offer to Berkshire's $1.7 billion purchase in 2003 of Clayton Homes Inc, a maker of manufactured homes. Clayton posted a $391 million pre-tax profit in the first nine months of 2007.

Berkshire bought Clayton "when an entire industry dependent on good credit ratings was flat on its back," Tilson said.

Thanks to Buffett's backing, "Clayton was able to provide financing for its homes, which gave it a huge competitive advantage because its competitors could not," he said.

Clayton's sector had been battered after lenders for years extended cheap financing to borrowers with poor credit. As the economy softened, more home buyers went into default, causing repossessed homes to flood the market at cheap prices. And worried investors soured on a wide variety of riskier credits.

Sounds familiar.

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