Buffett News Lifts Stocks

Reports that the billionaire has offered to insure $800 billion in municipal bonds boosted sentiment Tuesday, though some skeptics emerged

by Ben Steverman

SAUL LOEB/AFP/Getty Images

Stocks moved higher Tuesday as billionaire investor Warren Buffett waded deeper into the troubled bond insurance business, and the federal government and mortgage lenders announced another effort to stabilize the housing market.

Buffett's Berkshire Hathaway (BRKB) offered bond insurers an extra level of insurance on $800 billion in municipal bonds, he told CNBC on Tuesday. He made the offer to Ambac (ABK), MBIA (MBI) and FGIC, all firms stung by exposure to risky debt, and said one of those firms had already rejected his offer.

Meanwhile, the federal government announced a plan, developed with the top mortgage lenders, to freeze foreclosures for 30 days, an effort to help homeowners get out from under unaffordable mortgage payments.

Both plans got mixed reviews Tuesday, but the news was enough to lift investors' gloomy moods somewhat.

On Tuesday, the Dow Jones industrial average added 133.4 points, or 1.09%, to 12,373.41. The broader S&P 500 index gained 9.73 points, or 0.73%, to 1,348.86.

However, the tech-heavy Nasdaq composite index was essentially flat on Tuesday, edging down 2 cents to 2,320.04. Apple (AAPL) dropped 3.5% and Google (GOOG) fell slightly despite news of a deal with Nokia (NOK).

Investors spent the day debating how Buffett's offer would actually affect the credit markets. While Buffett is offering to insure municipal bonds, which are nearly risk-free, he is steering clear of the much more toxic credit instruments that have caused so much trouble in recent months.

Some saw the offer as a vote of confidence in municipal bonds, which despite their safety rely on insurance to help the market function properly. "By declaring his willingness to lend a credit rating of Aaa to nearly $1 trillion in municipal bonds, Buffett may help take the worst-case scenario off the table," Chris Lafakis, an economist at Moody's Economy.com, wrote.

But others were more skeptical. "I have a hard time seeing how it has any impact," says Matt Fabian, managing director of Municipal Market Advisors. Handing off muni bond insurance to Buffett might help the troubled insurers raise needed capital, but it would also come at a high price and rob the firms of earnings from their most lucrative business.

As a result, shares of both MBIA and Ambac both fell more than 15% Tuesday. Morningstar (MORN) analyst Jim Ryan wondered "why any bond insurer would agree to such a lowball offer." He added: "What sense does it make to dump zero risk" --the muni bonds -- "and retain the worst?" -- the risky subprime-related exposure. Ryan wrote he believes Buffett may hope regulators force bond insurers to take Berkshire Hathaway’s offer.

Meanwhile, the federal government announced a plan, called "Project Lifeline," designed to help homeowners with high mortgage payments to hold onto their homes. The plan, developed with the U.S.'s six largest mortgage lenders, gives homeowners facing foreclosure a 30-day delay when they can re-negotiate their loans.

While a previously announced plan was strictly for subprime borrowers, this effort is aimed at a broader swath of homeowners. However, its effect will be limited by the fact that many other lenders, representing half the nation's mortgages, didn't sign up to the 30-day foreclosure freeze.

The impact of the plan is likely to be modest, says Bill Larkin, fixed income portfolio manager at Cabot Money Management. The Bush administration proposal has made clear it prefers "market-based" approaches to the housing and mortgage crisis. "They're not going to come in and do bailouts," he says.

In all, the news from Buffett and the federal government failed to stop the bleeding in the riskiest parts of the credit market on Tuesday, Larkin says.