Savings Experiment: Snow Removal
The Money Man Behind Rick Santorum: Who Is Foster S. Friess?
The Associated Press reports that Berkshire Hathaway Inc. (NYSE: BRK.A) is betting some capital and its AAA credit rating on the municipal bond insurance business. To do that, it is buying the reinsurance unit NRG of ING Group (NYSE: ING) for $436 million.
What interests me is that Buffett -- whose Berkshire has $47 billion in cash on its balance sheet -- opted against putting any of that cash to use in the recent flurry of bank capital infusions. This decision tells me that Buffett believes banks have further to drop and that perhaps he has had enough trouble for one lifetime as a major investor in a Wall Street firm. That's because he got tied up in a Treasury bond trading scandal in the 1990s after a big investment in Salomon Brothers.
Why did Buffett decide to start a municipal bond insurer? He sees competitors about to exit the industry as they lose the AAA credit rating needed to stay in the business. That's because these insurers lack the capital needed to cover the losses from subprime mortgage backed securities they insure. And with Berkshire's ample capital and AAA credit rating, it can waltz right into the market and scoop up business from these faltering rivals.
However, there could be limited demand since, as Bloomberg News reported, many municipalities are realizing they can sell bonds without getting insurance. Nevertheless, there should be enough demand to keep Buffett in clover for quite a while. Yet, it is his decision not to invest in banks when they're down that makes me wonder how much further they will fall.Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
Goldman Earnings Sink After Buffett Dividend
Johnson & Johnson's Income Falls 23%
Burberry Shares Leap on Sales Update
