Friday, August 24, 2012

UH – OH --- Warren Buffet Ends Holdings on Muni Bonds CDS – Unwilling to Take Risks on Munis

 A Problem Ahead, or Just a Scared Investor? - Doesn 't Matter, If This Particular Investor is Scared There is a Problem Ahead

Financier Warren Buffet has made a lot of money being right.  So when Mr. Buffet’s companies issued Credit Default Swaps, which are insurance against default on state and local debt everyone took this as a good thing.  But Mr. Buffet has just decided to end his exposure, and has closed out over $8 billion worth of these CDS’s, meaning he is no longer willing to provide insurance for municipal bonds.

The Omaha, Neb., company recently terminated credit-default swaps insuring $8.25 billion of municipal debt. The termination, disclosed in a quarterly filing with regulators this month, ended five years early a bullish bet that Mr. Buffett made before the financial crisis that more than a dozen U.S. states would keep paying their bills on time, according to a person familiar with the transaction.

The insurance-like contracts, which required Berkshire to pay in the event of bond defaults, were originally purchased by Lehman Brothers Holdings Inc. in 2007, more than a year before the Wall Street firm filed for bankruptcy, the person said.

Issuing CDS’s is a nice lucrative business, because the issuer gets to keep the premium paid for the CDS and doesn’t have to come up with any money unless the bond that is insured defaults.  With state and local debt this has been a very rare occurrence.  So when Mr. Buffet decided to end this lucrative business, possibly at a loss that is something to be worried about.  The problem is particularly severe in California, although Illinois is also in the danger zone.

Some investors said the decision to end the bet indicates that one of the world's savviest investors has doubts about the state of municipal finances. If so, the move could be a warning to investors who have purchased such debt. In canceling the contracts early, Mr. Buffett probably "doesn't want this exposure anymore and is getting out while he can," said Jeff Matthews, a hedge-fund manager who personally owns Berkshire shares.

A major series of defaults in the municipal sector would create a Greece like problem for the U. S, and while that is not likely, it is clear that one of the most savvy investors ever thinks the risks have risen.

Great, just another thing to be worried about. 

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