Buffet Makes A Move
Stocks went up (133 points) and bonds values went down (increased interest rate = 0.06%) due to Warren Buffet coming into a key place in the economic market today.
Let’s look at this big news story.
Warren Buffet announced he was willing to back the faltering bond insurers (like AMBAC, MBIA, and Financial Guarantee Insurance) as a secondary insurer. In other words, if they failed to make any default payments, he would make them. Those bond insurers would have the advantage of gaining back their AAA rating (which, if you remember yesterday’s announcement, is attached to the security it insures). Some of these guys have lost their AAA rating, and that kills the interest rate that bond issuers must pay. However, you can bet your last share of Berkshire Hathaway that Warren Buffet is not doing this out of the goodness of his heart. He wants to get into this market, and make a killing.
Let’s look at his motivation. This is in the “sweet spot” of his investment knowledge – insurance. He will very probably restrict his $800B gamble to municipal bonds, otherwise known as “muni’s”. Municipalities are VERY low risk in not paying their bond obligations. He will NOT go into the sub-prime securities market, as that’s a great way to lose money.
Bond insurers, on the other hand, make their bundle of money on the “muni’s” market. I’m willing to bet that Buffet is going for the jugular. He is undoubtedly working in the background with the “regulators” of this market, encouraging them to unwind those insurers – as they don’t have enough capital to back their lousy sub-prime securities bets. Then he can step in and take over this very lucrative market.
Let’s hope he succeeds. Why??? Well, he’ll also bring some common sense to this market place, and insure that future bond insurers don’t jeopardize the entire bond market ever again.
Buffet’s offer will probably be rejected by the bond insurers. They don’t want to give up their “golden goose”. They want to be “bailed out” by the government.
The markets illogically looked at the Buffet announcement as a knight in shining armor coming to the rescue of the economy. Here’s a great example of the stock market grabbing the wrong end of the stick, and seeing only good news.
The other story today was that President Bush announced that the six biggest lenders will “freeze” foreclosures (people 90 days late in payments) for 30 days. I am so startled at this announcement that it makes me laugh. How can anyone expect that sticking a finger in this dyke will stop the flood of foreclosures? This is a big political move. Don’t forget it is an election year.
Here are today’s Numbers:
Dow Jones 30 Industrial – 12,373 (Up 133 points)
10 Year Treasury Bond – 3.68% (Up 0.06%)
Euro – $1.4583
Gold – $911 (Down $16)
Oil – $92.78 (Down $0.81)
Gasoline – $2.37 (Down $0.03)
Hello Tom,
You said that Bush’s tactic of freezing 90 day loan defaults for 30 days made you laugh -”How can anyone expect that sticking a finger in this dyke will stop the flood of foreclosures?”
Here’s my thought on it from a different perspective – what happens to the lending institutions? Can government come along and say, “OK you business owners and shareholders – sorry, you won’t get paid this month, (because we decided you shouldn’t and told all your customers not to pay) but go ahead and run your businesses the best you can without income!”
I wouldn’t be too pleased if the government did that to my business. I’d be interested in hearing your perspective on that.
The government can’t tell the banks not to foreclose, or force them to deal with people behind in their payments. This is a voluntary action by the banks. Only six banks are involved – not the thousands in the US. At best, this will delay the inevitable foreclosures. A few people will be able to refinance their way out of this mess, but not many people will be able to.