Buffett offers to reinsure $800 billion in muni bonds

By Dan Wilchins

NEW YORK (Reuters) - Warren Buffett said on Tuesday that he had offered to reinsure $800 billion of muni debt guaranteed by bond insurers, but shares in MBIA Inc (MBI.N) and Ambac Financial Group Inc (ABK.N) slid as investors recognized that the billionaire investor's plan was far from a panacea.

Berkshire Hathaway Inc's (BRKa.N) chief executive told CNBC television that he had extended the offer to MBIA, Ambac and FGIC Corp, and so far one of the three had rebuffed him. The reinsurance would cover about a third of the $2.4 trillion of debt guaranteed by U.S. bond insurers.

Investors said the bond insurers had good reason to reject the offer. Buffett said he would charge premiums of 50 percent above what the bond insurers are receiving from issuers on the policies, which many analysts saw as a high price.

Buying the coverage from Buffett would leave insurers with fewer safe assets to offset risk from their toxic ones.

"We would be delighted if this transaction occurred," said T2 Partners LLC Managing Partner Whitney Tilson, whose firm has bet against MBIA and Ambac through short sales. "It would enrich Berkshire Hathaway and impoverish MBIA and Ambac."

Still, the broad stock market welcomed the offer, which allayed fears that the bond insurers' difficulties would force investors to sell billions of dollars of tax-exempt municipal bonds. Any forced sales could depress bond prices and lift borrowing costs for cities and consumers.

Equities rose, and U.S. Treasury bonds dropped, implying that investors were more willing to buy risky assets. But MBIA shares fell 15.3 percent to $11.50 on the New York Stock Exchange, while Ambac dropped 15.1 percent to $8.90.

Bond insurers are expected to make billions of dollars in payments in the future after guaranteeing bonds like collateralized debt obligations (CDOs), subprime mortgage securities, and other risky debt.

These expected payouts have spurred ratings agency Fitch to strip Ambac and FGIC's main insurance units of their top triple-A credit ratings. Standard & Poor's has also cut the FGIC unit's ratings.

Buffett said reinsurance would shore up municipal bonds, but would not help the CDOs.

"I'm not sure anything is going to do much for the CDOs," Buffett said.

WRITE-DOWNS AND HEARTACHE

A bank group is working to rescue Ambac's main insurance unit, and a second group is trying to rescue FGIC's main unit. Both groups are hoping to keep the businesses intact, but if necessary, the good muni business could somehow be separated from the bad CDO and structured finance business, a person briefed on the matter said.

Eric Dinallo, New York's insurance superintendent, is working with banks on possible solutions.

Following news of Buffett's offer, Dinallo said in a statement on Tuesday: "I am pleased this provides one more option to protect muni bond issuers and investors."