Buffett Starts a Bond Company, Capitalizing on Credit Market Turmoil

Always a man to see an opportunity when it arises, Warren Buffett, is starting up a bond insurer in an effort to profit from the turmoil in the nation's credit markets. The bond company's aim is to make it cheaper for local governments to borrow and promises to be a tough competitor for the industry's embattled incumbents. 
 
The billionaire investor's Berkshire Hathaway Assurance Corp., set to open for business today in New York state, will guarantee the bonds that cities, counties and states use to finance sewer systems, schools, hospitals and other public projects. 
 
The new venture, backed by an almost-certain triple-A credit rating, is likely to be cheered by municipalities and municipal-bond investors because it will offer them an alternative at a time when other bond insurers' ratings look wobbly. 
 
Bond insurers help municipalities lower their borrowing costs, but the business demands that they maintain a top credit rating. In exchange for a guarantee fee, the insurer essentially transfers its premium rating to the city or state issuing the bonds, allowing the issuer to pay a lower interest rate and saving taxpayers money. 
 
Lately, however, credit-ratings firms have warned that some of the nation's biggest bond insurers, including Ambac Financial Corp. and MBIA Inc., risk losing their coveted triple-A ratings because the increased risk of mortgage-related bonds they insure could lead to massive losses and significantly erode their capital. 
 
That's created an opening for Mr. Buffett, whose Berkshire Hathaway Inc., owns some 50 businesses, including auto insurer Geico. "A new triple-A-rated player will take business from Ambac, MBIA and others because their own triple-A ratings are suspect," said Ed Grebeck, chief executive of Tempus Advisors, in Stamford, Conn. 
 
Mr. Buffett said in an interview that interest appears high enough for the new company to seek permission to operate in other states that account for a large chunk of municipal-debt issuance. After New York, he and Ajit Jain, who heads Mr. Buffett's insurance businesses, will seek approval to open in California, Puerto Rico, Texas, Illinois and Florida. 
 
"Ideally we'd be licensed in every state, but there's a limit to what we can do," Mr. Buffett told The Wall Street Journal. "We can't guarantee everything, and we will not take risk beyond what's prudent for us." He added, however, that he would commit "quite a bit of capital if we like the business." 
 
Mortgage Fears 
 
According to the Securities Industry and Financial Markets Association, municipalities issued about $290 billion in long-term bonds in the first eight months of 2007. They had been on track to break the 2005 record of $408.2 billion before debt markets seized up in August due to fears about mortgage-linked securities. 
 
For years, Mr. Buffett has criticized bond insurers for being so eager to write new business that they priced their insurance too low to reflect the bonds' underlying risk. "We felt that in many cases, the prices that people were charging were inappropriate," Mr. Buffett said. "As long as people were willing to accept that, there was no point in trying to offer something else." 
 
All of that changed about two months ago, when ratings firms Fitch Ratings, Moody's Investors Service and Standard & Poor's announced they were reassessing the triple-A ratings of the bond insurers, which guarantee about $2.4 trillion in bonds, the bulk of which are issued by municipalities. Few such bonds ended up in default over the past 30 years, making the business highly profitable. Like many on Wall Street, however, bond insurers got caught up in the housing boom of recent years and the accompanying mortgage-lending frenzy. 
 
Mr. Buffett's entry into the business is likely