Economy Blog » When $800 billion you reinsure, look as good you will not!

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When $800 billion you reinsure, look as good you will not!

This just in: Warren Buffett is pretty smart. Wednesday, the Oracle of Omaha offered to reinsure the entire municipal book of FGIC, Ambac, and MBIA, some $800 billion in bonds, in exchange for 150% of the “unearned” premium on those insurance policies. No word on whether he also asked for a pound of flesh or any one’s first born.Anyway, it was pretty obvious from the beginning that none of the monolines would be very keen to such a plan. By accepting, the monolines would be ceding the best part of their business, leaving only the shaky structured finance business remaining. On CNBC yesterday, Buffett tried to explain that the plan would be a net increase in capital for the monolines, so in theory the monolines would be able to keep their gilt-edged rating. Somehow he managed to keep a straight face. While technically the monolines may have more free capital after ceding the munis, the remaining portfolio would be substantially more risky, and I doubt the new capital ratios would please the ratings agencies. For what its worth, Ambac has already told Buffett thanks but no thanks….
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