On BRK and Buffett's Proposal to "Assist" the Mortgage Insurers

In response to a positive comment from an investor acquaintance on Berkshire Hathway, Warren Buffett's investment vehicle:

So, you have thrown in the towel and are riding Buffet's coattails? I know that is enticing. I had BRK-B until a few weeks ago when I sold it to raise cash. It was one of my few winning positions. But I thought at that time (near $5000) that it was probably a little overvalued and I had owned it since the low $3000s. People pay a big premium for BRK, more than the sum of the parts. Some of those parts won't be doing well for a while. He owns a lot of homebuilding materials companies, including furniture. His newspapers probably aren't worth too much any more, either.

The best time to buy BRK the past few years was after Katrina, when all the insurers got knocked down. That is when we got in. BRK has to have some very bad news to lose any of its market premium, there are so many people that want to own it. Maybe there will be enough bad news in consumer durables that will cause BRK to lose some premium, at least that has been my thinking. It is too big to grow much on its own, so it has become more of a valuation game to make money on BRK. (Buffett himself has said in the past at times that he would not buy BRK based on its over-valuation).

I think his proposal to reinsure the bond insurers (AMBAC, MBIA, PMI, etc), but only the municipal bond pool, is very interesting. Reinsuring something that doesn't need insurance in the first place is quite the joke. It is a typical Buffett move, intended to give him a lot of money, quickly, at very low risk. He is asking for $12B (1 1/2%) for extending 30 days of protection on a portfolio that is not at risk (the $800B of AAA municipal bonds insured by the group). But his proposal does not address the real problem with the bond insurers, the CDOs, et al.

It seems to me that if the insurers take the deal, they are admitting defeat: they are in such bad shape that only their very best, the municipal bonds, is worth anything at all, the rest is worth nothing. If the insurers tank, it will cause significant additional damage to the financial markets, and to the economy by extension. While I don't blame Buffett for trying to extort the insurers (that is exactly what this is), they should turn him down and work on deals that address their real problems.

They do need a capital infusion (Buffet's proposal does not provide them any more permanent capital, but only temporarily shifts capital coverage requirements) and a return of confidence by the market, but the best way is a gradual unwind of their positions in a rational way rather than a fire sale of their best assets as in a "going out of business" sale. They can always find a buyer for a municipal bond insurance portfolio.