By Dan Wilchins
NEW YORK (Reuters) - Billionaire investor Warren Buffett said on Tuesday that he had made an offer to three of the top bond insurers to reinsure $800 billion in municipal debt, but one of the struggling companies has rebuffed the plan while the other two have not yet responded.
The chief executive of Berkshire Hathaway Inc told CNBC television that he had extended the offer to MBIA Inc, Ambac Financial Group Inc and FGIC Corp.
Buffett said he would charge premiums of 50 percent above what the bond insurers are receiving from issuers on the policies, which many analysts saw as a high price. There is a good chance that none of the bond insurers that received the offer will accept it, portfolio managers said.
Still, the broad stock market welcomed the offer because many investors feared that the bond insurers' difficulties would further weaken credit markets. Equities rose, and safe U.S. Treasuries dropped, implying that investors were more willing to buy risky assets.
But shares of the bond insurers themselves dropped because the offer would do nothing for the risky assets that are causing headaches, and could in fact leave them with fewer resources to deal with expected losses in the future.
"We would be delighted if this transaction occurred," said T2 Partners LLC Managing Partner Whitney Tilson, whose firm has sold MBIA and Ambac shares short. "It would enrich Berkshire Hathaway and impoverish MBIA and Ambac."
Buffett said the move would shore up municipal bonds, but would not help the repackaged debt known as collateralized debt obligations.
"I'm not sure anything is going to do much for the CDOs," Buffett said.
Buffett would not say which bond insurer had turned down his offer.
Ambac and MBIA officials declined to comment. FGIC, whose owners include mortgage insurer PMI Group Inc and private equity firms Blackstone Group LP, Cypress Group and CIVC Partners LP, did not return a call seeking comment.
The offer comes after Buffett started selling municipal bond insurance himself. Berkshire Hathaway is trying to get approval in all U.S. states to insure bonds issued by states, cities, and other local government authorities, and last month guaranteed its first deal.
Getting approvals may take some time. That, combined with working with rating agencies to get top ratings, means that buying into a bond insurance business probably makes more sense than starting one up, Wilbur Ross told Reuters on Monday. Ross is looking at investing $1 billion in a bond insurer.
WRITE-DOWNS AND HEARTACHE
Expected losses on CDOs have forced bond insurers to write down billions of dollars of assets. Those write-downs have eaten into the insurers' capital and endangered the top credit ratings that are crucial for their business.
Ratings downgrades are bad for bond insurers, but may be even worse for credit markets. If bond insurers lose their "triple-A" ratings, the securities they guarantee would also be downgraded, and investors that can only hold top-rated assets would be forced to sell their insured holdings.
That could result in billions of dollars of municipal bonds, CDOs, and other debt flooding bond markets, lifting borrowing costs for cities and consumers.
Concerns about potential downgrades and forced selling have prompted two groups of banks to try to rescue Ambac and FGIC. Eric Dinallo, New York's insurance superintendent, is working with banks on possible solutions.
Following news of Buffett's offer, Dinallo said in a statement on Tuesday: "I am pleased this provides one more option to protect muni bond issuers and investors."
Buffett's offer includes a 30-day clause to allow the bond insurers to come up with a better deal.
Hopes that Buffett's offer would reduce forced selling helped lift the Standard & Poor's 500 index by 1.2 percent to 1354.86.
But analysts at Royal Bank of Scotland wrote that any deal with Buffett could increase the probability of downgrades.
MBIA shares fell 11.4 percent to $12.03 on the New York Stock Exchange, while Ambac dropped 13.7 percent to $9.05.
(Additional reporting by Lilla Zuill, Walden Siew, Anastasija Johnson and Jonathan Stempel; Editing by Lisa Von Ahn and Jeffrey Benkoe)