Buffet Strikes Again!

Not to idolize the man or anything, but the Oracle from Omaha has smelled an opportunity! His insurance company has been granted approval to start insuring municipal debt in New York state.

Bloomberg link

Shares of MBIA and Ambac Financial, two large bond insurers, dropped on the news. The market knows! I mean who are you going to trust, two greedy companies or W.B.? These two companies had it coming since they chose in the past to insure all types of debt without really checking the risk out for themselves and relying on the debt ratings agencies.

This whole bond insurance thing seems a bit odd to me anyways! If you buy a bond and think there is some risk of repayment then shouldn't you be compensated via a higher interest rate? I mean if you need to buy insurance then maybe you shouldn't be buying the bond in the first place. Similarly, if the debt issuer has a good reputation, then you don't need the insurance!

I suppose there maybe some instances where this financial engineering has a role but leave it to the investment bankers to take a good idea and leverage it to beyond the point of recognition - until it turns risk diversification into risk magnification. I've read of debt insurance companies like MBIA turning around and buying insurance (like re-insurance) on the policy they sold. This firm then also 'offloads' the risk to other players down the line, until someone at the end is 'long' the risk. The problem is, everyone of these insurance companies didn't realize that the underlying CDO had some toxic waste (i.e. subprime) in it. Every company down the line now suffers a capital hit and is at risk of downgrades. This has the potential for cascading failures as these insurance companies may have other policies with other counterparties that may not be 'subprime'

How much are those baby Berkshire shares anyways? Maybe this is the safe haven play during periods of market volatility?