BUFFETT SEES MUNIS AS A GOOD BET

Warren Buffett likes what he sees in the bond insurance business: Munis.

The billionaire investor offered reinsurance on up to $800 billion of municipal bonds. Speaking on CNBC, he said his Berkshire Hathaway holding company offered the reinsurance to Ambac Financial Group, Inc., MBIA and Financial Guaranty Insurance Co.

He said one firm, which he didn’t name, rejected the offer and the others have yet to respond.

Bond insurers are struggling. They were originally founded to insure mainly municipal bonds but recently ventured into the risky sub-prime market. Those moves backfired and most insurers are facing rating downgrades and the need to raise additional capital.

Buffett said his offer isn’t motivated by a charitable desire to bailout the insurers, but by the opportunity to make money. He said he would back only municipal bonds.

Contrary to some reports, Buffett has no interest in bailing out insurance companies. His offer is a vote of confidence in municipal bonds as an asset class (underlying credit). It is clear that he has no interest in the riskier portion of the insurers’ portfolios, which are the Collateralized Debt Obligations (CDOs) that created the crisis for these companies in the first place.

As the insurers’ woes have come to light, many municipal bond investors have expressed concern. As we’ve stated, issues with strong underlying credit remain strong, continue to pay and will not require assistance from insurers.

We have tried to keep bond insurers’ troubles in perspective and continue to help our clients find value in the market.

As you can see, if you’ve taken advantage of today’s higher yields caused by the insurers’ problems, you’re in good company.

02/12/08