Bloomberg News

Ambac Rejects Buffett's Offer for Municipal Contracts (Update2)

February 13, 2008

Ambac Financial Group Inc. (ABKFQ:US), the first bond insurer to lose its AAA credit rating amid the mortgage market collapse, rejected an offer by billionaire Warren Buffett to hand over control of the company's municipal-bond business.

The proposal by Omaha, Nebraska-based Berkshire Hathaway Inc. to take over $800 billion of municipal-bond guarantees from Ambac, MBIA Inc. (MBI:US) and FGIC Corp. wouldn't free up enough capital, according to an e-mailed statement from Ambac spokesman Peter Poillon. The proposal would have required New York-based Ambac to pay Buffett about $4.5 billion to assume the obligations.

The proposal isn't ``in Ambac's interest or the interest of all of Ambac's policyholders,'' Poillon said.

Ambac is among five companies struggling to maintain its top bond-insurance ratings after widespread downgrades on subprime mortgage-linked securities that the companies guaranteed. On Jan. 18, Fitch Ratings cut Ambac Assurance Corp. to AA from AAA after the company put off plans to raise equity capital.

``Ambac continues to vigorously pursue various alternatives for taking our franchise forward to the benefit of all of our policyholders,'' Poillon said in the statement.

Ambac fell (ABK:US) 17 cents to $8.73 at 10:17 a.m. in New York Stock Exchange composite trading.

A Non-Starter

Ambac, MBIA and other bond insurers are reeling largely from an expansion beyond their traditional municipal-bond insurance businesses into guaranteeing riskier structured-finance products including mortgage-liked securities and collateralized debt obligations. CDOs repackage assets such as mortgage bonds and buyout loans into new securities with varying risk.

``In our view, Mr. Buffett's reinsurance plan is unfortunately a non-starter for the primary bond insurers,'' Tamara Kravec, an analyst with Bank of America Securities, wrote in a Feb. 12 research report.

The plan would strip the bond insurers of their low risk municipal business without solving the possible significant losses related to the structured-finance side of the business, Kravec wrote.

``If the bond insurers are left with mainly high risk structured finance portfolios, more capital may be necessary as losses rise,'' Kravec wrote.

More downgrades of the bond insurers are possible without a bailout plan, according to Kravec.

Ambac on Jan. 16 slashed its dividend (ABK:US) 67 percent and said it would sell stock or equity-linked notes to bolster its capital, partly to meet Fitch's demand to raise $1 billion by the end of January. Two days later it scrapped the share sale.

The capital-raising plan provoked a dispute between the board and Chief Executive Officer Robert Genader, who left the company as a result, according to a company regulatory filing.

To contact the reporter on this story: Christine Richard in New York at crichard5@bloomberg.net

To contact the editor responsible for this story: Emma Moody at emoody@bloomberg.net


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Companies Mentioned

  • MBI
    (MBIA Inc)
    • $11.97 USD
    • -0.17
    • -1.42%
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