February 12 2008: 5:21 PM EST
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Buffett offers to help ailing bond insurers

Billionaire's Berkshire Hathaway approached three largest firms, offering to reinsure $800 billion of municipal bonds.

By David Ellis, staff writer

Buffett to the rescue
The billionaire investor offers a plan to reinsure up to $800 billion currently insured by troubled bond insurers.

NEW YORK (FORTUNE) -- Billionaire investor Warren Buffett said Tuesday he is offering to take over the liabilities of the troubled bond insurers, whose shaky finances have regulators and Wall Street greatly alarmed.

The billionaire's Berkshire Hathaway (BRKA, Fortune 500) approached the three largest bond insurers last week - Ambac (ABK), MBIA (MBI) and FGIC Corp. - offering to reinsure about $800 billion in tax-exempt or municipal bonds in order to maintain their 'AAA' rating, Buffett told CNBC in a televised interview.

"This would just eliminate one major cloud from the market," said Buffett.

Under the deal, Berkshire Hathaway would add $5 billion in capital to his recently formed bond insurance company - Berkshire Hathaway Assurance Corp. - that would strengthen the new company's ability to take on the liabilities of the other bond insurers.

Buffett, however, admitted that the offer was not solely a gesture of goodwill to help rescue the struggling industry.

Berkshire would stand to collect a steep 150% of the companies unearned premium reserves. Ambac and MBIA's combined reserves stand at $6 billion, so in their cases Berkshire would receive $9 billion for taking over their liabilities.

"We are doing this to make money, and if you put up $5 billion you ought to make some money," he said during the interview.

Buffett said one of the three companies that was approached had already rejected the offer, declining to reveal which one. The other two have not responded to the proposal.

Calls to Ambac, MBIA and FGIC were not immediately returned.

If any of the insurers were to agree to a deal, they would still have 30 days to back out.

The plan, however, was warmly received by some key players in the unfolding story.

Perennial bond insurer critic Bill Ackman of Pershing Square Capital Management, who has increased his short positions against the industry recently, praised the Buffett plan, calling it "very appealing."

Speaking at a conference at the Hudson Institute in Washington Tuesday, Ackman said the plan would not only free up capital for the bond insurers, but would provide some much-needed stability for the credit markets and would forgo a proposed rescue by Wall Street.

"I think the Berkshire plan is a home-run solution," said Ackman.

The bond insurance industry has been under significant scrutiny for the better part of the past two months. While much of their business involved insuring corporate debt and municipal bonds, the three companies were among those that got stung after insuring mortgage-backed securities. They now find themselves overwhelmed by claims and short on capital.

As a result, Standard & Poor's last month put the entire bond insurer industry on review for possible downgrade.

Such an outcome would severely damage the bond insurers' business and possibly result in further writedowns at some of the nation's leading financial firms, which have already lost billions as a result of the ongoing credit crisis.

Both regulators and Wall Street have reportedly been working to organize a rescue effort for the cash-strapped insurers.

Late last month, New York Insurance Superintendent Eric Dinallo implored a number of Wall Street banks to provide capital for the troubled insurers.

And a little over a week ago, reports surfaced that a group of eight banks were working together to make an investment in Ambac.

There has also been talk that a private equity or a distressed opportunity investor could step in to rescue these troubled firms, including famed investor Wilbur Ross. Ross said recently he would soon decide whether to invest as much as $1 billion in one of the so-called monoline insurer.

Amid the recent turmoil, Berkshire Hathaway opened up its own bond insurance business, Berkshire Hathaway Assurance Corp., in New York State in January.

So far, the business is proving lucrative. Buffett said his firm recently inked a deal to reinsure $50 million in debt for a 2% fee.

"All we did on that was back up the present bond insurer in case they don't pay," he said. "It just shows you what the state of the market is now." To top of page

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