Ultimate Fade: Buffet's Offer To Buy the "Prime" & Not "Subprime"

Discussion in 'Trading' started by ByLoSellHi, Feb 12, 2008.

  1. The market is up on the scantest of reasons - Buffet's offer to buy out the municipal bond insurance business of the three largest bond insurers.

    He won't touch their subprime exposure with a 10 foot pole, and told them that.

    So, smartly, he wants to put them in a position where regulators pressure the companies to say yes, even though it would be among the WORST BUSINESS DECISIONS EVER MADE - So bad, in fact, that it may represent a breach of duty to shareholders if they say yes.

    Their muni business is their very essence of being, and is generating positive cash flows. The drain is subprime.

    If Buffet or anyone else picks them apart, and just buys the muni end, what does that leave them with?
     
  2. i think this whole thing is ridiculous. why he would want any part of that market is a mystery to me.
     
  3. So what's the fade? What should I be shorting?
     
  4. The Buffet factor. Just mentioan his name and everybody who watches CNBC buys - from someone who is selling

    Muni insurance is a low risk high profit business. Buffet is taking advantage of the insurers weakness to get a slice of that and the market is acting like "we are saved" If Buffet insures the MUNI bonds then presumably it requires less capital for an AAA rating to be maintained, but it doesn't end the problem of having insured CDO's. It may allow the banks t delay a writedown and will stop funds selling munis downgarded to below the level they can hold (sell downgraded munis to who though?)

    Fact is the banks won't buy student loan now, last lot did not get off the block it seems. Nobody is buying commercial peoperty debt or Private equity eal debt...................We are not saved yet.
     
  5. Mvic

    Mvic

    Didn't you already start a thread on this very topic?
     
  6. Yes. A more specific one. This one is more general, about the effects the specifics are having on the overall market.
     
  7. I have to agree. This is a very thin reed for the market to rally on. Buffet is getting cheers for trying a move that any other buyout artist would be getting jeered for. It's clearly a nonstarter, but it puts pressure on the insurers.
     
  8. Mvic

    Mvic

    I disagree, it puts some footing under a significant part of the market that is being threatened by the toxic stuff. Infact this is exactly what needs to happen, the wheat needs to be separated from the chaff so that the repricing can occur without taking down the whole system. As long as the toxic stuff is tied up with good stuff like the munis they whole system will be held hostage and no repricing can occur.
     
  9. The rally is based on the idea that when (and not if) the monoline insurers are downgraded they will always have the option of selling their muni book to buffett, which won't solve the problem but the capital injection will stave off certain death until perhaps the economy picks up and the rest of their portfolio improves.

    If the economy continues to weaken it is inevitable that these monolines will go bankrupt and the only question would be who would bail them out. The buffett put option gives the market a sense of security i suppose.
     
  10. tkolber

    tkolber

    Muni insurance is a low risk high profit business. Buffet is taking advantage of the insurers weakness to get a slice of that and the market is acting like "we are saved" If Buffet insures the MUNI bonds then presumably it requires less capital for an AAA rating to be maintained, but it doesn't end the problem of having insured CDO's. It may allow the banks t delay a writedown and will stop funds selling munis downgarded to below the level they can hold (sell downgraded munis to who though


    Its indeed low risk but their future participation( Ambac Financial Group Inc., MBIA Inc. and Financial Guaranty Insurance Co) is limited at best to sell muni ins ... if their reserves are inadequate .

    cheers
    john
     
    #10     Feb 12, 2008