Muni investors skeptical of Buffett's rescue offer

By Anastasija Johnson

NEW YORK (Reuters) - Municipal bonds backed by the three largest bond insurers were little changed on Tuesday as investors expressed skepticism that billionaire investor Warren Buffett's rescue plan for the companies would be accepted.

Buffett offered MBIA Inc (MBI.N), Ambac Financial Group Inc (ABK.N), and FGIC to reinsure $800 billion in municipal bonds they hold to free up some of their capital.

The bond insurers are struggling to raise capital to keep their top "AAA" ratings or prevent further downgrades as losses related to faltering subprime mortgages raise questions about their ability to pay claims.

Only one trader said bids on municipal bonds insured by these companies rose, while two other portfolio managers and a trader said there was no broad-market reaction even as stocks rallied. Bellwether Treasuries fell.

"It doesn't seem like an offer that could be easily accepted," said Evan Rourke, municipal bond portfolio manager at MD Sass in New York. "Most of the muni guys looked at the offer and said (insurers) will never do that."

Analysts said there was a good chance that none of the bond insurers that received the offer will accept it, in part because Buffett said he would charge them 50 percent of the premiums the insurers receive now.

Buffett said one of the struggling companies has rebuffed the plan while the other two have yet to respond.

Yet his plan encouraged some investors on Tuesday, said Lou D'Andrea, muni trader with GMS Group, in Livingston, New Jersey.

"I guess it will take some time for them to digest it. There is somewhat of a better bid for MBIA, AMBAC and FGIC insured bonds," D'Andrea said.

Prices of municipal bonds insured by these companies have declined in recent months as clouds over insurer ratings reduced the value of their guarantees.

The plan could help bond insurers, reeling from expected payouts on repackaged debt, free up capital by offloading some of their risk to Berkshire Hathaway.

Under Buffett's plan -- which included a 30-day clause to allow the bond insurers to come up with a better deal -- the companies would be left with a portfolio of riskier debt, including collateralized debt obligations.

Analysts said it would be difficult for bond insurers to accept his proposal because they would have less income from their safer muni assets to offset potential losses from increasingly toxic assets like CDOs.

"There is a lot more to (insurer) portfolios than municipals so it is kind of hard to for them to accept this kind of offer, but I am sure they are considering it," said Daniel Solender, manager of municipal bond investments at Lord, Abbett & Co. in Jersey City, New Jersey.

But the offer by Buffett, known as a savvy value investor, to reinsure debt sold by state and local governments bodes well for the $2.5 trillion municipal bond market, which has been rocked by bond insurer troubles.