Buffett cuts $16 billion municipal credit bet in half

NEW YORK Tue Aug 21, 2012 5:40pm EDT

Investor Warren Buffet arrives for the premiere of the film ''Wall Street: Money Never Sleeps'' in New York September 20, 2010. REUTERS/Lucas Jackson

Investor Warren Buffet arrives for the premiere of the film ''Wall Street: Money Never Sleeps'' in New York September 20, 2010.

Credit: Reuters/Lucas Jackson

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NEW YORK (Reuters) - Berkshire Hathaway Inc will terminate $8.25 billion in credit default swap protection it has sold on municipal debt, more than half of a total $16 billion in protection it has sold on bonds of states, cities and towns, the company said in a regulatory filing this month.

The move comes as many investors, including Berkshire Chairman billionaire investor Warren Buffett, foresee an uptick in U.S. municipal bankruptcies.

Buffett said last month that the bankruptcies of three California cities in as many weeks was making traditionally objectionable Chapter 9 municipal bankruptcy filings more palatable to local governments in financial crises.

Berkshire sells protection against the default of states, towns and cities using credit default swaps. In these contracts the company would be required to reimburse its counterparty for debt losses in the event of a municipal bankruptcy.

Berkshire said in its filing that it reached an agreement with a counterparty to terminate $8.25 billion of the CDS portfolio, which references more than 500 state and municipal debt issuers. It did not name the counterparty to the trades.

The Wall Street Journal earlier reported the trade termination.

Analysts at Citigroup said in a report that the disclosure likely represents the termination of contracts that Berkshire held with the estate of Lehman Brothers, which failed in 2008.

Lehman bought $8.25 billion in CDS protection on bonds from 14 states from Berkshire subsidiary BH Finance LLC in 2007, before the bank failed, Citigroup said.

Lehman's estate has been trying to close out the trade since February 2009, but has struggled to do so because of the trade's large size and relatively low liquidity volumes in the municipal CDS market, Citigroup said. The contracts had gained in value to Lehman's favor at the time of its bankruptcy, Citigroup added.

After Berkshire's disclosure, "it seems that finally it has succeeded, unwinding it directly with Berkshire Hathaway," Citigroup said.

Representatives of Berkshire and Lehman did not immediately return calls seeking comment.

Berkshire also reduced its exposure to CDS backed by high yield corporate debt in the first half of the year, to $3.26 billion, from $4.57 billion at the end of 2011, it said in the filing.

The company said that it has taken no new CDS positions in 2011 and 2012.

(Editing by Andrew Hay, Matthew Lewis and Dan Grebler)

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