Buffett’s “Insurance Transaction” Lifts Equities
Last week Warren Buffett ruled out an investment in the monoline bond insurers, but did not close the door completely:
“We could have some kind of insurance transaction with them but we will not be investing in them or any other bond insurer…We’ve got our own bond insurer…Berkshire Hathaway Assurance is already up and running in New York State and has already done a couple of deals.”
That was last Tuesday; the following day Buffett acted, and today we get the news, this transcript straight from Buffett's mouth:
"And last Wednesday, Berkshire Hathaway made a firm offer to the three largest bond insurers, who in aggregate I think, insure about 800 billion (dollars) of tax exempt bonds".
"And what we said we would do is, and we gave a copy of this, of course, to the Superintendent of Insurance of New York. We said we would form, we would add to our company's resources five billion dollars. That five billion dollars in the new insurance company, we would pledge that there would be no dividends or any kind of distributions or management fees taken out of that for ten years, so all the earnings of that company would be retained to build up the claims-paying ability."
“And we offered to take over the liabilities for the whole $800 billion of these three companies for a premium that would be equal to, essentially, one-and-a-half times the remaining premium left over the life of the bonds. They have what they call an ‘unearned premium reserve’ which reflects the original premium less the amount that’s been proportionately earned. And we said, for one-and-a-half times that amount, we would take away all of their liabilities so that the $800 billion in bonds would carry a real triple-A insurance, and would sell in the market as if it had real triple-A insurance. Whereas now the bonds sell at significant discounts.” CNBC
Everyone will parse this to death today, and we will leave it to them. The bears are unlikely to yield any ground.
While this won’t necessarily bail us out of a giant mess in one fell swoop, it does address one important issue, and Buffett’s plan puts muni’s to the “front of the line”:
Buffett added “If it’s left to its natural course, and the CDOs prove to be a disaster, because there will be a disaster earlier, they will use up the funds of these companies, and in effect, the municipals stand at the back of the line. So, our system puts the municipals at the front of the line. What’s going on now leaves the municipals at the back of the line because the funds will get depleted for all of these other types of insurance before they get to the municipals in very large part.”
About a month ago signs of progress were finally appearing, and this theme continues to move slowly along, including Hank Paulson’s various efforts:
January 10th
This is what we like to see. Seemingly in the past 24 hours many of our problems have been addressed. Warren Buffet and bond insurers. Bernanke wakes up. Someone brokers a deal for Countrywide before things get really messy.
Nice. But addressed, not fixed. Game Changer
The Kerviel inspired lows were looming, but that was the washout that we needed. Many professionals investors are calling January the toughest month they have ever seen, but time has come to slowly begin increasing exposure to this market. The healing process will take time, but much of the de-levering by big institutional investors is probably the rear view mirror. The bears will continue their fight, and none of these solutions are perfect, but we are moving ahead.
Nobody is going to get rich quickly, but the market will be back to 1500 on the S&P by the time the clouds have truly parted. Hopefully heavy volume and other technical indicators give bulls a confirmation of sorts, but our model is finally moving back to a more neutral posture (40% to 50% net long) after it turned net short last fall.
Perhaps the next development will be further sovereign wealth injections into banks and brokers, cross-border strategic M&A transactions, and private equity interest in small and mid-cap domestic equities.
The rally today is nice, but we are likely in a stalemate for the next few months as the mess begins to get cleaned up. But if you take them one at a time you are being offered multi-year valuation lows in many individual securities.
That is too tempting to pass up, particularly in those stocks that have merely come in with the market.
Buffett Transcript
CNBC
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