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The Last Straw...

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February 12, 2008 – Comments (13)

Well, if this isn't the last straw in the domino...

http://www.reuters.com/article/businessNews/idUSN1222649420080212?feedType=RSS&feedName=businessNews 

Be careful out there, this has huge implications on the market. 

13 Comments – Post Your Own

#1) On February 12, 2008 at 10:28 AM, floridabuilder2 (99.28) wrote:

correct me if i am wrong... but i think buffet's plan is simple... he has vast holdings and doesn't want them to tank

muni's don't default... so buffet reinsuring muni's is like selling earthquake insurance in idaho...

this basically saves one of the major issues with the bond reinsurance companies.. and that is the downgrading of muni debt and increased cost of capital

however, it changes nothing with cdo's etc....  in other words abk and mbi are still worthless..... 

i think it is a great strategy because the muni market should not be penalized for being in the same basket as the lowest level tranches of this disaster...... 

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#2) On February 12, 2008 at 11:22 AM, AnomaLee (28.57) wrote:

I don't see anything wrong here.  This is actually a very major move by the Oracle to take on a liability offer of $800 billion. I think too much positivity is given to every move Mr. Buffett makes, but history has shown that when he take on large positions they prove to be very rewarding.

The fact that Ambac declined signals they may think they deserve a more rewarding offer or that their business could stand on its own without the Oracle's help or  However we know how good Ambac is at risk-reward management, and they just may be standing in quick sand... then they'll have no choice but to accept a higher premium for any reward...

I'd consider this a positive for the long-term because it means that the smart money sees an opportunity here and will step in to at least rescue these muni-bonds with their deep pockets. I'm certain that every economic group in government is analyzing this situation and trying to manage a positive outcome.

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#3) On February 12, 2008 at 12:13 PM, WillSurfForFood (81.02) wrote:

From the few details in the article Buffet is only offering to Re-insure their best assets at a steep premium. Despite the title of the article it is not an offer to help them. It is an offer to make Berkshire Hathaway more money. If the financial crisis gets worse they may be forced to accept his "help", of course maybe the deal he is offering will get more expensive as well. Buffet is smart. I should own more shares (class B of course).

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#4) On February 12, 2008 at 12:28 PM, Capsperson wrote:

I agree with WillSurfForFood.  Buffet is cherry picking.

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#5) On February 12, 2008 at 1:19 PM, MakeItSeven (32.31) wrote:

I agree that this is just a cruel joke on the part of Buffett.  It's like saying: "I guess you guys are dead anyway, why don't you PAY me to take the last remaining pieces of flesh from your bones:"

Under the offer, Berkshire would assume liability in exchange for 1.5 times the current premium the firms are receiving. Buffett said one firm has rejected the offer, and the other two have not responded."

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#6) On February 12, 2008 at 2:27 PM, dwot (69.77) wrote:

I didn't call this the last straw because of the story, but because of what the story didn't say.  The municipal guarantees are the only thing of substance the insurers have and these assets get sold I'd predict the down grades on them would be very quick as would the requirement to write down debt they insure.

I think the recent raising of capital is probably small compared to what would be required with downgrade losses.

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#7) On February 12, 2008 at 5:39 PM, chk999 (99.97) wrote:

I don't think this is being done for Ambac's benefit.

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#8) On February 12, 2008 at 6:53 PM, DemonDoug (82.22) wrote:

there's no way this deal would go through.  I'm not sure what buffett is playing at, and how would berkshire raise the premiums 50% anyway?

btw munis can and do default, although it's more rare.  See: Orange County.

Likely the muni bond insurance portfolio will get sold or distributed to creditors when these companies get liquidated through chapter 7.  Unless Berkshire maybe is a creditor to the monolines... does anyone know?

BTW dwot, I'm totally on your side that the financial system is F'ed, but this certainly isn't the last straw.  The last straw would be something like Citi defaulting on it's bonds and unable to provide cash to clients who have savings in their bank.  At that point we'll have a rally in things like bread and AK-47's.  No one's rioting outside my doors right now... (btw I don't expect Citi to go through that, at least not anytime soon).

I believe the Fed and the banks are doing all they can to have an "orderly" unwinding of derivatives and stock markets as well as currencies, I have to hand it to them they are doing a fairly remarkable job, because based on the news and fundamentals pretty much the whole house of cards would be tumbling down all that once.  The risk is still there of a true black swan - btw a black swan would be a 2000-3000 point down day for the Dow.  But the market manipulators will do everything they can to prevent that from happening in one day or week. 

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#9) On February 12, 2008 at 6:55 PM, DemonDoug (82.22) wrote:

also, dwot, um...

"Well, if this isn't the last straw in the domino..."

I think you are mixing your metaphors there :P  I'm not sure how straws through a domino would relate..... 

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#10) On February 12, 2008 at 7:23 PM, dwot (69.77) wrote:

We are on the same page here Doug...

I think if Berkshire gets this deal, that's what causes Citi to go...  Citi is already grossly capital impaired and if they have to write the stuff off that Ambac is insuring they are in way bigger trouble.

That last domino is resting on straw... 

chk99, I don't think so either, I think if this happens it puts them out of business...

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#11) On February 12, 2008 at 8:02 PM, TDRH (99.67) wrote:

As Doug said, municipalities do default.   The offer was probably just to test the waters for desparation, but it is not without risk.    Think of the potential loss of revenue for a municipality with foreclosed, and depreciating homes.    Areas like Detroit, Florida, California, and Las Vegas must be hurting. 

Buffet smells blood in the water-they are all wounded and unlike the LBO sharks he does not need to swim, move, eat or die.  (ie BX)    Wonder what others have the liquidity  to take advantage of the of opportunties.  

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#12) On February 12, 2008 at 8:11 PM, dwot (69.77) wrote:

I like this this quote

"Wow! Buffett To The Rescue! NOT!

"Because Buffett just stuck his knife in the back of the monolines, hit the aorta, and then gave the knife a couple of REALLY good twists! "

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#13) On February 13, 2008 at 8:33 AM, AnomaLee (28.57) wrote:

More or less the Buffett story sounds like he is leveraging himself socially/politically. This is the guy who lobbies on Capitol Hill and he's much like George Soros on how they don't disclose any inside information so important to their business without some certainty in their actions.

This story has been all over the news and announcing his willingness to "aid the market." It forces these companies by the media to think harder before their wreckless actions really begin to worsen the lives of countless people.

There's been a huge price correction going on in the in Considering most of the crap (CDS's) that is floating now will expire within the next 3-4 years. Things are going to get worse, before they get better in the credit markets.... but i still can't gauge how it's going to effect most investors 

Chairman of Soros Fund Management on CDO's & Credit Swaps

 

 

The force of the bear is strong in you...

I sense much fear in you...

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