Warren Buffett calms stock markets
In a move designed to make money, said the “Sage of Omaha”, legendary investor Warren Buffett has offered to underwrite $800 billion (Â£400bn) of U.S. municipal bonds.
The offer goes to three “monoline” bond insurers, Ambac Financial, MBIA and Financial Guaranty Insurance. One has already rejected the deal, and he is still awaiting reponses from the other two, although one of them is making favourable noises.
The move certainly perked up global stock markets yesterday, as the monolines are seen as the second line of defence against the sub-prime mortgage fiasco by propping up banks’ balance sheets in the event of meltdown.
Traditionally, the bond insurers mainly concentrate on municipal risk, but they too got caught up in the collective madness of sub-prime lending for the same reason respectable banks did : greed for perceived easy money.
However, the monolines are now short of capital and are being hit by downgrades from the rating agencies.
T J Marta, fixed income strategist at RBC Capital Markets, said it was a coup for bond insurers, which could help them avoid “the doomsday scenario”.
Let us hope so.