Felix Salmon reads the tea leaves left by Warren Buffet and concludes that the already disastrous monoline situation is unlikely to improve any time soon. Money quote:
Given all these reasons to buy bonds rather than insure them, I do wonder what’s going to happen to the monoline market. Historically, it’s been a license to print money — but it might be a very long time before it re-emerges.
Read his entire post Here.
Remember, when Buffett’s Berkshire Hathaway Assurance Corp. rode in to rescue the imploding monoline municipal bond insurance market at the request of the NY Insurance Department? Now, after little more than a year in the business, Buffett wants out .
Berkshire Hathaway Assurance Corp. insured $3.3 billion of new long-term municipal issues in 2008, taking almost 5 percent of the insured market in its first year of business, based on data compiled by Thomson Reuters. In the first quarter of 2009, Berkshire’s share of insured municipal new issues shrank to 3 percent on $354 million of deals, the data show.
“We basically don’t like the pricing,” Buffett told reporters after a press conference in Omaha on May 3. “If you have the wrong pricing, you can lose a lot of money.”
Berkshire guaranteed $15.6 billion of existing debt in the secondary market and $3.7 billion in new issues, Buffett said in the annual letter.
Salmon’s analysis unpacks Buffett’s remark about pricing.
Most importantly, if Buffett has been buying up munis cheap in the secondary market, he’s probably getting much higher yields than he could ever charge in the primary market as an insurer. He might be able to charge a percentage point or two to insure an issuer against default, but I’m sure he can find munis for sale at spreads much wider than that.
See related post on The Policyholder Perspective: Bond Insurer FGIC Ordered To Stop Writing Policies and To Cease Paying Claims; ISDA Announces FGIC 'Failure to Pay' Credit Event.