| I love watching The Oracle of Omaha, Warren | | | | more than $800 billion worth of muni-bonds. |
| Buffett. Yesterday, he caused the Dow Jones | | | | Now back to Warren's offer. |
| Industrial Average to move up over 130 points by | | | | In the muni-bond market prices have fallen. |
| making a simple announcement. What did he say? | | | | Investors are afraid that problems in the real |
| He offered to "help", and I use that term lightly, | | | | estate market will hurt the re-insurance |
| troubled re-insurance companies Ambac (ABK), | | | | companies. Unfortunately, the re-insurance |
| MBIA (MBI), and Financial Guaranty. | | | | companies offered a similar type of insurance to |
| Whenever these offers arise, you have to | | | | CDOs and other mortgage backed securities - the |
| analyze who they really help. | | | | ones having all the problems. If the insurance |
| His offer really doesn't benefit these companies | | | | companies suffer financially, their ability to make |
| much... and in my opinion may actually hurt them. | | | | good on muni-bond insurance comes into question. |
| But, it did give me a great investment idea (more | | | | Warren has offered to provide new insurance to |
| on that in a minute). | | | | these muni-bonds, but only if the current insurers |
| Here's why this is a bad deal for these guys. | | | | pay him 150% of the premiums left on the |
| Ambac, MBIA, and Financial Guaranty are all big | | | | contract. Remember, muni-bonds are backed by |
| re-insurance companies. They're a little different | | | | local governments supposedly making them some |
| from your homeowners or car insurance | | | | of the safest bonds around. |
| company in that they don't insure people or | | | | So, old Warren gets the safest part of the |
| property, they insure financial securities. Here's | | | | re-insurance portfolios . . . and they only need to |
| how it works. | | | | pay a 50% premium. This is a horrible deal for the |
| Let's say you work for the city and have been | | | | re-insurance companies. Not only would this |
| put in charge of building a water treatment facility. | | | | transaction create a loss, they would have to give |
| The population is growing and everyone needs | | | | up the safest and most stable part of their |
| clean water. You design the plant and get quotes | | | | business. Warren would also get a leg-up for a |
| from construction companies. Before getting | | | | new business he started just a few weeks ago . . |
| started you need to raise money for the project. | | | | . providing insurance on muni-bonds. I doubt any |
| To do that you need to sell bonds. | | | | of them will take him up on his offer (but we |
| To sell bonds, you meet with a number of | | | | know how losses do tend to cloud people's |
| investors. These pension funds, insurance | | | | thinking). |
| companies, and endowments all have billions of | | | | However, the news gave me a great investment |
| dollars to invest, and they like your project. Best | | | | idea. |
| of all, your bonds are backed by the local | | | | Warren invests in value - meaning he likes to buy |
| government as they're municipal bonds. This | | | | things cheaply. Clearly he sees value in the |
| provides a level of safety and gives tax | | | | muni-bond insurance market. That's why he |
| advantaged status to certain holders. | | | | started a new business in this area. Strong profit |
| But you have a small problem. The interest rate | | | | for an insurance company is driven by lower |
| investors want is higher than you anticipated. You | | | | anticipated default rates. If anticipated default |
| call one of the big re-insurance companies and find | | | | rates are lower, than muni-bonds are currently |
| out that you can purchase insurance on your | | | | undervalued. |
| bonds. Essentially, the re-insurance companies | | | | I took a quick look at closed-end funds investing |
| promise to make good on the bonds if your | | | | in muni-bonds. Some of them are trading at |
| project fails. This gives investors more comfort | | | | discounts of 7% or more and have very |
| and allows you to get a lower interest rate. | | | | attractive yields. Depending on your portfolio and |
| Ambac, MBIA, and Financial Guaranty have | | | | tax situation, now might be a good time to make |
| worked with hundreds of local governments on | | | | some strategic investments into these muni-bond |
| thousands of projects. They are currently insuring | | | | funds. |