Buffett's an opportunist, not a hero

Buffett's a sage and, viewed from a certain angle, a ruthless one. This isn't Buffett propping up the companies for the good of the market. It's a coldhearted business decision. Just as it was after Sept. 11, 2001, when he made billions in premiums when Berkshire Hathaway (BRK.A, news, msgs) was one of the few companies to offer terrorism insurance. In each case, the markets needed Buffett's capital to keep the economy moving. And in each case, Buffett recognized the opportunity to charge outrageous rates without taking huge risks.

So who's the victim here, besides the companies? It's the monoline insurers' shareholders, which might include you if you or your retirement-plan administrators own any mutual funds or exchange-traded funds with exposure to these key financial companies. They will suffer mightily, as the deal Buffett has offered would not stave off dreaded downgrades of the monolines' credit ratings for very long, actions that are likely to bring on their deaths.

But state and federal regulators would allow these shareholders to be barbecued in the interest of finding a safe harbor for the guarantees of the hundreds of thousands of bonds issued by states, cities and special districts.

Most of the world doesn't see it this way, of course, which allows Buffett to appear as a white knight. As I described in my column last week, the consequences of a downgrade of the monoline insurers if they were still responsible for guaranteeing muni debt would be too catastrophic to even contemplate.

As you may recall, the monolines basically rent out their AAA rating to municipalities in exchange for insurance premiums. So a downgrade of the monolines' ratings would in turn mean a downgrade of the munis. Due to contract covenants that require munis to hold high ratings, a downgrade would in a great many cases require cities and states to buy back much of their trillions of dollars of debt from buyers -- which would be impossible -- and force them into bankruptcy or into enormous tax increases to pay for higher interest rates.

An offer they can't refuse?

The monolines have a month to think this offer over or find a higher bidder. But the pressure will grow ever more intense for them to take it. Already this week the world of seemingly low-risk credit got a lot more tense when a large set of bonds sold by municipalities with rates set through periodic auctions failed to attract much interest, requiring deal runners Citigroup (C, news, msgs) and Goldman Sachs (GS, news, msgs) to commit their own thinning capital to the deals.

This is something that never happens, and the consequences are grave. Just to give you an idea, Bloomberg reports that rates on $100 million in bonds sold by the Port Authority of New York and New Jersey this week soared to 20% from 4.3% a week ago. Debt put on the block by Presbyterian Healthcare in Albuquerque, N.M., and New York state's Metropolitan Transportation Authority met a similar fate, according to the wire service, as investors' confidence in the credit strength of the insurers has plummeted.

There's an additional $300 billion in "auction rate" securities at now at risk, according to officials, and much of it now will never come to market -- leaving local governments with no way to pay for infrastructure. It may be hard to believe this could happen just a month after the Federal Reserve lowered interest rates by a whopping 1.25 percentage points, so it shows that the problem today is not the quantity of money available but the willingness of banks to lend it.

The bottom line is that the condition of the financial markets is still so murky that it's way too early to be thinking about the potential for a near-term bottom either in this industry or in the broad market. Buffett, one of the world's richest men, stands to get a bit richer. The rest of us will have to wait.

Fine print

To learn more about Warren Buffett's holding company, Berkshire Hathaway, visit its Web site. It's almost certainly the homeliest of all corporate sites hosted by an S&P 500 ($INX, news, msgs)company, matched perhaps only by the one hosted by Leucadia National, my own favorite financial holding company. . . . To learn more about the Jolly Roger, visit this page. . . . To learn more about the role of monoline insurers in growing the collateralized-debt-obligation business, see this paper(.pdf file). . . .

To learn more about Ambac, visit its Web site. . . . Before the world caved in on the monolines, they had a really good business. From 1995 through spring 2007, Ambac shares were up 650% versus 210% for the S&P 500, while rival PMI Group's (PMI, news, msgs) shares were up 800%. Ambac is now down 26% since 1995 while PMI is up just 54%. (The S&P is up 185% in that span.)

At the time of publication, Jon Markman did not own or control shares of any companies mentioned in this column.

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