Buffett buffs up market

Warren Buffett has waded into the bond insurance mess. MarketWatch reports:

Warren Buffett's Berkshire Hathaway on Tuesday came off the sidelines in the mortgage-market crisis, unveiling a plan to reinsure $800 billion of municipal bonds currently guaranteed by three of the world's largest bond insurers...

Berkshire proposed to take on the liability for the bonds in exchange for a payment from the current insurers of 1.5 times the premium they've received. See a copy of Berkshire's proposal...

Buffett's offer would cover municipal bonds but not the billions of dollars worth of complex securities known as collateralized debt obligations (CDOs) that Ambac, MBIA and FGIC have also guaranteed.

Investors initially took this as good news for the bond insurers.

Shares of some bond insurers initially gained ground on the news, lifting the broader market on hopes the plan will relieve one of the main pressure points in the current credit crisis.

How naive can investors be? This MarketWatch report probably comes closer to the true situation.

"He's calling the bond insurers' bluff," said Bill Ackman, head of Pershing Square Capital Management LP, a hedge fund firm that's been shorting, or betting against, shares of MBIA and Ambac...

"If they really believe that they won't have any losses on CDO books, they should take this deal," Ackman said during a presentation on Tuesday. "But I think the bond insurers know that they don't have enough capital for their structured finance obligations without the muni side of their business."

Jim Chanos, head of short selling hedge fund firm Kynikos Associates LP, agreed that the bond insurers are unlikely to accept Buffett's offer.

"It's interesting, but no one in their right mind will take that for obvious reasons," Chanos said during the same presentation. "They can't afford to."

Buffett is trying to show that "the emperor has no clothes," while he builds a bond insurance business of his own, Chanos added.

Now that's more like the Buffett we know.

Ambac shares eventually fell 15 percent yesterday while MBIA fell 15 percent. However, the rest of the stock market managed to finish higher, the S&P 500 gaining 9.73 points, or 0.7 percent, to 1,348.86.

European stocks saw even bigger gains yesterday. The FTSE 100 gained 3.5 percent while the FTSEurofirst 300 index gained 3.4 percent. Apart from the Buffett plan, lower-than-expected inflation in the UK provided a little bit of good news.