Buffett's an opportunist, not a hero

By Jon Markman

When Warren Buffett announced his solution for the beleaguered bond insurance industry earlier this week, you half-expected him to end his statement with a hearty "Yo, ho, ho!" and wave the Jolly Roger.

His offer to reinsure the low-risk municipal bonds backed by Ambac Financial Group (ABK, news, msgs) and MBIA (MBI, news, msgs), but not their problematic, low-rated obligations in structured finance, was about as piratical as you can get and stay on this side of the law.

You almost have to admire the old buzzard's devious but brilliant gambit, as it was the equivalent of a rich man walking into the parlor of a family about to lose its home to foreclosure and offering to buy all the good furniture, tapestries and china at pennies on the dollar.

His plan to provide backup insurance for $800 billion in guarantees would briefly shore up the finances of these devastated monoline insurers, to be sure, but it would also leave them with so much exposure to faltering debt instruments that the insurers would remain fully vulnerable to life-threatening downgrades from bond-rating outfits.

The good news about Buffett's move is that it exposed to the world just how disconnected the equity world is from the credit world. The gesture was greeted with a clueless surge in stock prices, but the debt world recognized the ineffable cynicism embedded in the Omaha, Neb., investor's gesture and pushed risk spreads wider -- their equivalent of a big thumbs down.

The insurers, meanwhile, rejected Buffett's proposal with the financial equivalent of a single-finger salute, apparently preferring their headlong journey to disaster to his somewhat slower path to the same destination.

Livin' on a prayer

As much as I want to empathize with the monoline insurers in their season of humiliation, I can't help but wonder whether they are making the wrong move. After all, the bond insurers' executives have already made one boneheaded move after another in order to get to this point, deviating in the past decade from the business of guaranteeing supersafe municipal bonds to expand into the risk-mad world of guaranteeing securities larded with subprime mortgages. And now they are showing a sort of complacency about their weakened position that's reminiscent of a novice investor who just can't seem to sell a position that's down 80%.

Clearly, the mortgage insurers are hoping the change in global risk appetite that has killed their business plans is just a bad dream. They are hoping that if they wait just a bit longer, the Federal Reserve's massive cuts in interest rates will kick in and loosen up credit and that all of the rips and bruises in the collateralized debt obligations they had naively insured will magically self-repair. They are hoping the federal government will come up with a plan to indemnify them for losses. They are hoping, wishing and praying for a miracle, in other words.

But you know what? Hoping and praying is a lousy business plan. And it's just the sort of naivetéthat Buffett has spent decades exploiting as a relentless, merciless vulture investor.

Hope sinks

The fact that these seemingly smart people are acting so dumb is not much of a surprise, however, once you put it in the context of a global bear market. Near the start of bear markets and recessions, we learned at the start of this century, hope is in ample supply.

Complacent investors convince themselves that every dip is to be bought, just as complacent business managers convince themselves that every low-grossing season can be blamed on the weather or a bad merchandising mix. There are no setbacks, only hurdles. Hope springs infernal.

Bear markets are all about extinguishing those hopes. They are uncompromising affairs that take every opportunity to lift investors' natural optimism only to the point at which the next blow can whack them more painfully than the last. They grind you down until you come to think that hope is a four-letter word meaning "idiot."

Buffett is essentially asking the prayerful insurers to sell him the one thing they have ever made money on -- muni guarantees -- and hold on to the junk that no one can value. He is trying to rip out their throats while they're up against the wall -- the high-finance equivalent of a payday loan. He's suggesting they give up the tremendous long-term income stream generated by municipal bond issuers' insurance payments for enough cash to get through the new next few months.

Continued: Nothing charitable about this move

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