Warren has form...
The offer from Berkshire Hathaway to take the monolines' stable profitable business - muni wraps - and leave the unstable loss-making part - structured finance - reminds me of LTCM. It is a little discussed part of the LTCM saga that Buffett made an offer to acquire the assets (but not of course the liabilities) of LTCM just before the 11 bank FED-sponsored bail out that eventually rescued the fund. (More details of the LTCM farrago are here and here while Naked Capitalism has more on Warren's offer to the monolines here.) Then as now the question is why on earth anyone would accept the Buffett proposal.
For the monolines it does not seem as if Dinallo can force them to, and provided they can carry on paying claims, they can operate at least in semi run off for some years. Who knows, the CDO market might even have recovered by then. Even after a downgrade I do not see what would persuade the monolines to do a cash negative deal such as Buffett is offering: they would just bleed to death faster. Which does rather beg the question as to why he proposed something that they are palpably so far from being able to accept.
For the monolines it does not seem as if Dinallo can force them to, and provided they can carry on paying claims, they can operate at least in semi run off for some years. Who knows, the CDO market might even have recovered by then. Even after a downgrade I do not see what would persuade the monolines to do a cash negative deal such as Buffett is offering: they would just bleed to death faster. Which does rather beg the question as to why he proposed something that they are palpably so far from being able to accept.
Labels: Monoline, Worst case scenarios
posted by David Murphy at 06:06
2 Comments:
David - please do speculate. Why did he make them an offer they were bound to refuse?
I honestly don't know. It could be that he (or rather Jain and the team as I suspect Warren is rather aloof from the details) think that their capital problem is bigger than their liquidity problem and so anything that reduces capital requirements is on the table. It could be that having been cut a very favourable deal by Dinallo in setting up BHAC the favour is being called in and it is being strongly suggested that they do something to help. If they don't want anything to do with MBIA or Ambac's portfolio, preferring instead to compete for new profitable muni business, making an offer that can't be accepted would be a good way to get Dinallo off their backs. Or it could be that they simply mis-structured the offer.
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