Nat Worden
"The money market funds are the area where there would be the most concern about liquidity as a result of credit downgrades at the bond insurers," says Gavin Murphy, national editor with The Bond Buyer.
Bond insurers take upfront fees from issuers in return for their guarantees to pay the bondholder interest and principal in the event of default. But they don't recognize all the revenue right away for accounting purposes. They recognize it over the life of the bond, and they record the unrecognized income on their balance sheet as unearned premium reserves. Berkshire's brand new municipal bond insurance outfit is offering to shoulder $800 billion in municipal bond liabilities at the three companies in return for a cash payment of 1.5 times their unearned premium reserve -- a rate that he said is a competitive price in the current market. He pledged to put up $5 billion in capital reserves for the business. Meanwhile, he will allow the companies to accept his firm offer, but shop around over the next 30 days for a better one. If they find a deal more to their liking, the companies could back out of the Buffett offer for a small breakup fee. Many of the municipal bonds backed by the bond insurers are already trading as if they have no insurance. If Buffett's proposal were accepted, Ackman said those bonds would immediately trade like a Triple-A rated security. "They will appreciate in value, and the money market mutual funds will get a huge benefit," said Ackman. "There will be no dumping of those securities, so you completely eliminate the systemic risk associated with this." Meanwhile, Buffett pointed out that since municipal bonds are typically longer-term obligations than structured finance securities, the municipal bond policy holders will effectively be pushed to the back of the line if the bond insurers are hit with a wave of claims on CDOs. "We'll move them up to the front of the line," Buffett said, though he acknowledged that Berkshire was not making the offer out of altruistic impulses. "When I go to St. Peter, I will not present this as some act that will entitle me to get in. We're doing this to make money." Ackman said that Buffett's offer amounted to calling the bond insurers' bluff. "The bond insurers have said they're not going to end up taking material losses on all this structured stuff," Ackman said. "They say all of these market-to-market losses they're taking in the billions of dollars are going to revert to zero over time. Buffet is saying that if that's true then they can take the municipal risk off their books and everything that's left can be distributed to shareholders as profit."
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