Buffett’s New Bond Insurance Venture to Trigger Hiring Spree
The Oracle of Omaha has entered the beleaguered bond insurance industry. The billionaire investor told The Wall Street Journal he is ready to plow “quite a bit of capital” into his newly launched municipal bond insurer, Berkshire Hathaway Assurance Corp., which will insure bonds in New York and at least four other states. Buffett’s move comes as business rivals, MBIA and Ambac, struggle to raise capital. Despite knee-jerk worries about competition, shares of the rival companies have jumped. Taking their cues from the billionaire investor, investors are now betting that there is money to be made in the sector. Executive search firm, A.E. Feldman, says the development will undoubtedly bring jobs to the financial guarantee industry. Opportunities will open up for candidates with expertise in the municipal bond market.
Bond insurers assume responsibility for timely payment of interest and principal if the obligations they hold go into default. According to the WSJ report, Berkshire Hathaway Assurance will focus on guaranteeing municipal debt - the bonds that cities, counties and states use to finance sewer systems, schools, hospitals and other public projects.
Municipal debt is widely considered low risk. In contrast, the fallout of the subprime mortgage meltdown has battered rival bond insurers, MBIA and Ambac. They got into trouble by venturing into collateralized debt obligations (CDOs). Created from pools of bonds, CDOs can include mortgage-backed securities.
In New York, the State Department of Insurance, has already issued a license to Buffett’s new muni bond insurance firm, according to a report in The Insurance Journal. The report quotes New York insurance Superintendent, Eric Dinall, as saying the department expedited Buffett’s license because his new bond insurer is “a very positive development” and the department will “work with new entrants to ensure a vibrant competitive market.”
While struggling bond insurers now have a formidable new rival, Berkshire Hathaway Assurance is widely perceived as a positive development. With thousands of investors watching his every move, Buffett’s foray into bond insurance suggests he believes the industry’s long-term outlook is favorable.
