He already owns the rating agency so why the heck not?
Pretty big waste of capital in my opinion. You could have 8 triple-A bond insurers fighting over a shrinking market.
Eddie Deezen Wrote: ------------------------------------------------------- > Pretty big waste of capital in my opinion. You > could have 8 triple-A bond insurers fighting over > a shrinking market. Just wanted to make sure that quote was preserved. Buffett wasting capital in the insurance business?
Eddie; how many AAA rated bond insurers are solely in the muni market?
Not trying to say I’m smarter than Buffett, but why dump money into a sector that is not only losing a huge part of its biz (structured finance), but is already too crowded? If XLCA and FGIC receive needed capital (also asumming MBIA and Ambac does as well), then you would have 8 fully capitalized triple-As fighting over what…muni bonds?! There better be a crap load of new muni issuance coming to the market to satisfy all these guys. FGIC was the last one to insure only munis (they did some SF, but less than 5%) until GE Cap sold them off. And why did they sell them?..too low of an ROE.
Triple AAA credit rating is crucial to a successful bond insurance business, and all these other bond insurers are losing their shirt right now because they’ve been under-capitalize to justify their credit rating. Insuring multi-billion worth of debt with only a couple billion in capital is very shaky, adding on the fact the insured underlying are correlated in someway with one and another (unlike insuring life and natural hazards), and you have a recipe for disaster. So it makes alot of sense for a strong parent with ample financial resource and a diversified business mix, aka Bershire, to enter into this business. Is the industry getting crowded? Maybe. But you have a bunch of wounded, under-capitalized players that just showed the public that they’ve been recklessly underwriting policies, putting their own credit rating (basicly their product) at risk. On the other side you have Berkshire offering their unshakable credit rating and proven underwriting discipline, who will the customer choose now? Seems like Buffet entered the industry at a great time.
Eddie Deezen Wrote: ------------------------------------------------------- > Not trying to say I’m smarter than Buffett, but > why dump money into a sector that is not only > losing a huge part of its biz (structured > finance), but is already too crowded? If XLCA and > FGIC receive needed capital (also asumming MBIA > and Ambac does as well), then you would have 8 > fully capitalized triple-As fighting over > what…muni bonds?! There better be a crap load > of new muni issuance coming to the market to > satisfy all these guys. > > FGIC was the last one to insure only munis (they > did some SF, but less than 5%) until GE Cap sold > them off. And why did they sell them?..too > low of an ROE. It makes sense to me. FGIC had to have been a good ROE before spreads got compressed. If you look at wrap fees from the last 5 years they had a steady decline in the face of competition, even for more risky assets. If you’re charging 20bps for subprime mortgages, or 30-40bps for CDO or CDO^2, then something is wrong. That’s why profitability was reduced, especially with hard drivers like XL/ACA/Assured coming into the market driving the spreads down more. Those days are gone and if these guys lose their AAA rating they won’t even be in the running compared to a Birkshire company. Especially now, in this market, the Munis will look to somebody stable and he will be able to charge a bit more, Buffet will be able to get a nice profit going off of what will probably be concieved as the most stable and well run businesses.
Has anyone been paying attention to BRK.A? It’s really taking a shlacking lately. I’m curious because Warren’s been in the news a lot making purchases and this seems to be one of those times where he would find great bargains. Is the selling because of emotion or because there are some people (analysts) out there who know things I don’t?
Barron’s did a cover story on how Berkshire stock was 10% over valued.
I remember the article you’re talking about…that’s all it takes eh? Well, it’s down that 10%. Still seems a bit extreme. Coincidentally, there was an article in WSJ today (C1) about the poor reinsurance market being a possible issue for Berkshire.