Whether bond insurers get rescued as regulators seek possible new sources of capital for them, or suffer credit rating downgrades that threaten their business, or even their survival, Buffett's Berkshire Hathaway Inc should be well-positioned to cash in. -- PHOTO: AFP

Whether bond insurers get rescued as regulators seek possible new sources of capital for them, or suffer credit rating downgrades that threaten their business, or even their survival, Buffett's Berkshire Hathaway Inc should be well-positioned to cash in.

Berkshire, which created Berkshire Hathaway Assurance Corp on Dec 28 to enter the bond insurance market, has the balance sheet, credit ratings and pedigree to gain a strong foothold and become a major force, experts said.

Its entry comes amid expectations that MBIA Inc and Ambac Financial Group Inc, and smaller rivals such as FGIC Corp and ACA Capital Holdings Inc, are going to be severely weakened at best.

In creating a bond insurer, Buffett is counting on issuers paying him higher fees for the security of having the backing of 'triple-A' rated Berkshire and its US$47.08 billion (S$67.28 billion) cushion of cash.

He has not shown any interest in bailing out an entire business, as he tried in 1991 when he took over Salomon Brothers after a scandal involving fictitious bids on US.

Treasury sales. That is considered one of Buffett's worst investments.

'Berkshire has stated an intent to do premium business at premium prices,' said Janet Tavakoli, president of Tavakoli Structured Finance Inc in Chicago, who has worked in structured products since 1985 and owns Berkshire stock. 'It has very good underwriting standards, likes to completely understand the risks of what it is underwriting and has the capital to back its insurance products.' Berkshire did not immediately return a request for comment.

Getting caught
Bond insurers, which guarantee some US$2.5 trillion of bonds issued mainly by state and local governments, got caught after venturing beyond writing coverage for bonds typically used to finance hospitals, roads, schools and sewer systems.

Instead, they chose to also underwrite a variety of structured products, including securities backed by risky subprime mortgages, whose value has plummeted. This jeopardized MBIA's and Ambac's triple-A ratings and left the insurers scrounging for capital to cover possible claims.

Fitch Ratings withdrew FGIC's triple-A rating on Wednesday.

By venturing into bond insurance on its own, Omaha, Nebraska-based Berkshire is not burdened by any known or undisclosed problems it could face if it bought a rival.

And Berkshire, with more than 70 businesses, also offers issuers the security that monoline insurers cannot. Monolines are so named because their only business is to insure timely payments of interest and principal on bonds they insure.

Regulators including New York's insurance commissioner are working with banks to explore ways to shore up the industry.

Absent a fix, investors may unload hundreds of billions of dollars of bonds they no longer consider as safe as they thought, especially if the insurers' ability to provide coverage is questioned. Borrowing costs would also rise, straining municipal budgets and, ultimately, burdening taxpayers.

Big Berkshire bets
Mr Buffett does not have this worry.

Ajit Jain, a Berkshire insurance executive considered a candidate to eventually replace 77-year-old Buffett, has been quoted as saying Berkshire might support existing insurers through reinsurance and capital.

Mr Jain was unavailable to comment.

Berkshire has made some big bets on insurance before.

In October 2006, its National Indemnity Co unit took on some US$7 billion of liabilities of Equitas, which Lloyd's of London created a decade earlier to avoid collapse from claims tied mainly to asbestos.

It was essentially a bet the worst is over for asbestos.

Many companies stopped using asbestos for insulation and fireproofing by the mid-1970s, but the after-effects can take decades to surface.

Berkshire was also able to charge higher rates to cover storm damage after many rivals retrenched following Hurricane Katrina in 2005. That was a good move in 2006 and 2007, both quiet years for big storms. Mr Buffett has said Berkshire is willing to lose US$6 billion from a single storm.

And this month, Berkshire bought a 3 per cent stake in Swiss Re, now worth roughly US$830 million, and agreed to take on 20 per cent of its property and casualty reinsurance business for five years.

Mr Buffett told the Wall Street Journal last month that in venturing into bond insurance, 'we will not take risk beyond what's prudent for us.' Mr Tavakoli said that probably means no structured products.

'I've met Warren Buffett. I've spoken to him about structured products. He's astonishingly good,' Mr Tavakoli said.

'I would be surprised if he were to touch the financial guarantors' structured products, given that the underwriting standards seemed so poor. Berkshire is clear that it is happy to do zero business when the risk premiums make no sense and that's something the guarantors didn't learn.' -- REUTERS

Read Regulators should halt bond insurer dividends: Ackman, Bond insurers' outlook dims after rating cuts and Bond insurers' possible downgrade spurs market angst