Warren Buffett to the rescue
Berkshire's proposed offer to reinsure troubled MBIA and Ambac is an attempt to do what Congress and Ben Bernanke have yet to do - soothe jittery markets.
NEW YORK (CNNMoney.com) -- Forget about Fed rate cuts and that $170 billion stimulus package headed for President's Bush desk. Warren Buffett wants to be the one to snap Wall Street out of its funk.
Buffett, appearing on CNBC Tuesday morning, said that his Berkshire Hathaway (BRKA, Fortune 500) firm has offered to reinsure up to $800 billion in municipal bonds currently insured by troubled bond insurers MBIA, Ambac, and FGIC.
Buffett said during the CNBC interview that one firm has already turned down his offer and that he is still waiting to hear back from the other two (he didn't name which one said "no").
The news of Buffett's proposal helped some, but not all, bond insurers. Shares of Ambac and PMI (PMI), a mortgage insurer that owns a 42% stake in FGIC, were trading modestly higher Tuesday morning. But shares of MBIA fell more than 5%.
But more importantly to investors is the fact that the Berkshire proposal helped lift the overall market higher Tuesday.
Stocks were already set to open higher thanks to news that General Motors (GM, Fortune 500) reported a smaller-than-expected loss in the fourth quarter and was offering buyouts to 74,000 of its workers.
The Berkshire offer kicked stocks into a higher gear though with the Dow up nearly 200 points early Tuesday morning.
However, Buffett's plan wouldn't help bond insurers with their most troubled securities - collateralized debt obligations, many of which were backed by subprime mortgage loans.
Phil Dow, director of equity strategy at RBC Dain Rauscher, pointed out that investors are most fearful of financial services' companies exposure to CDOs, not municipal bonds.
Insurer AIG (AIG, Fortune 500) disclosed Monday that it was writing down nearly $5 billion in credit swaps and CDOs in its portfolio. The company had originally said it expected the write down to be $1.6 billion.
So it's unclear if Buffett can really fix what's ailing Wall Street. "This is a psychological positive to have someone step in and try and stabilize things. But is it a building block for a big market recovery? I don't know," Dow said.
However, it does appear that one motivation behind the offer is a desire to restore some much needed stability to the financial markets.
CNNMoney.com sister publication Fortune obtained a copy of a letter sent earlier this month by Ajit Jain, president of Berkshire Hathaway's reinsurance group to Gary Parr, the deputy chairman of Lazard, the banker for MBIA.
In that letter, Jain wrote that the offer "also has the appeal of serving the greater public good, not an unimportant consideration for us, both as a matter of principle and as a company with a vested interest in national economic conditions."
But Buffett, of course, is not a complete altruist. The world's most legendary investor certainly must believe that this offer will be beneficial to Berkshire or else he wouldn't have made the proposal.
"Buffett is a great investor. He sees value in fixing these franchises and I guess he thinks that trying to insure bonds that may not need that much insurance is a good investment. He's not doing this as a charity," Dow said.