MBIA's CEO Tells CNBC He's "Comfortable" Competing with Warren Buffett

In a live on-set interview during today's Closing Bell on CNBC, MBIA CEO Jay Brown told us he's "comfortable" going up against Warren Buffett's new bond insurance company, although he acknowledges that Berkshire Hathaway can be "tough" competition.

In response to a question from Michele Caruso-Cabrera about Buffett "going after" his business, Brown suggested Buffett might not be in it for the long haul:

  "I have competed with Warren Buffett in the insurance space most of my life.  They're tough competitors.  They offer a unique product.  And they also like to come in and out of markets.  The muni market, or the structured market, when you look at it, needs constant players in there.  We've seen a huge drop in bond coverage provided by the market.

    Warren saw an opportunity.  Warren never misses an opportunity to jump in, especially when there's stress.  And so I think I'm pretty comfortable we can compete with Warren."

It's was an interesting interview, with Brown talking in detail about his plans and goals for the troubled bond insurer, which today held onto its AAA rating from Moody's, at least for now.  He revealed that MBIA is done raising "significant dilutive capital." 

Buffett letter may tackle bond insurers, succession

Warren Buffett's annual letter to Berkshire Hathaway Inc shareholders may hint at what's next in his bold foray into bond insurance but is unlikely to give specifics on his search for a successor.

Berkshire said it plans to release Buffett's commentary, perhaps the most dissected shareholder letter in corporate America, and its annual report Friday afternoon.

Unlike most CEOs who provide sterile, lawyer-massaged, upbeat overviews of their companies, Buffett writes in homely terms about what he wants: his successes, his mistakes, and the markets and the economy and the people who mess them up.

"This is exactly Buffett's kind of market, with dislocations in the financial space," said Mohnish Pabrai, author of "The Dhandho Investor" who models his portfolios after Buffett and last June agreed to donate $650,100 to charity to dine with the billionaire.
One dislocation is in the troubled bond insurance industry, where the security of Omaha, Nebraska-based Berkshire's "triple-A" credit rating holds great appeal for issuers and investors. Buffett created his own bond insurer in December, led by Berkshire's top insurance executive, Ajit Jain.

But Buffett will talk about more. Last year's letter ran 22 pages and some 13,000 words on such issues as the soaring U.S. trade deficit, the government's and individuals' over-reliance on debt, greedy hedge funds and excessive executive pay. Buffett takes a $100,000 annual salary to run Berkshire.

Still, Buffett, 77, may be coy on the issue of succession.
To be sure, America's most famous investor, the so-called Oracle of Omaha, now thinks more about his legacy and the day he ends his now 43-year run at Berkshire.

He has committed much of his roughly $52 billion net worth to charity, mainly the Bill & Melinda Gates Foundation. And an authorized biography is slated for September release.

Buffett has said he has three internal candidates to succeed him as chief executive, and four candidates to run Berkshire's $107 billion stock-and-bond portfolio as chief investment officer.
Berkshire did not respond to a request for comment.

Speaking in Toronto on Feb. 6, Buffett said youth may be a priority for his board. "Anybody who takes my (CEO) job would do better if they have a long run ... say 15 years," he said.

Analysts have long touted as CEO candidates Jain, General Re Corp's Joseph Brandon, MidAmerican Energy Holdings Co's David Sokol, Geico Corp's Tony Nicely, and NetJets Inc's Richard Santulli. Nicely and Santulli are already in their 60s.

As for the CIO candidates, Buffett said "there's no reason to bring them on now," though all showed "not only the desire but the eagerness ... to come with us the day I go ga-ga."

Chad Kane, who invests $950 million at WoodTrust Asset Management in Wisconsin Rapids, Wisconsin, said, "It's hard to state your successor when you don't know when you're going to hang it up. It's possible all seven names could change."

DRY POWDER AMID TURBULENCE

Buffett built Berkshire into a $216 billion collection of more than 70 companies selling ice cream, paint, underwear and Ginsu knives and buying such stocks as Coca-Cola Co, Procter & Gamble Co and Wells Fargo & Co.

News on Feb. 14 that Berkshire had taken a $4.32 billion stake in Kraft Foods Inc spurred a 6.9 percent jump the next day in shares of the maker of Maxwell House coffee, Oreo cookies and Cheez Whiz.

And despite purchases such as December's agreement to buy a $4.5 billion stake in an industrial group owned by Chicago's Pritzker family, Berkshire has plenty of dry powder for a big acquisition. It ended September with $47.08 billion of cash.

Berkshire has fared well in turbulent markets. Its stock rose 29 percent in 2007, dwarfing most stocks and the 8 percent decline in the Standard & Poor's insurance index.

Still, fourth-quarter operating profit may fall amid pressure on insurance premiums. "(Property and casualty) rates will be less adequate in the next couple of years," Buffett said in Toronto.

Analysts on average expect fourth-quarter profit excluding investments to fall 9 percent from a year earlier to about $2.6 billion, or $1,692 per Class A share, according to Reuters Estimates.

The housing crisis could also hurt several Berkshire units, such as Acme Brick Co, insulation maker Johns Manville, carpet maker Shaw Industries Group Inc, and HomeServices of America Inc, a large residential real estate brokerage.

Buffett has also generated controversy.
He offered this month to reinsure $800 billion of largely safe municipal debt backed by MBIA Inc, Ambac Financial Group Inc and FGIC Corp. But he demanded hefty premiums, and the insurers would have remained saddled with exposure to riskier, subprime-related and other complex debt.

"I think he would have been somewhat surprised had they accepted his offer," Kane said.

And on Monday, a federal jury in Connecticut found five former insurance executives, including four from General Re, guilty of fraud over a transaction to inflate the balance sheets of the insurer American International Group Inc. Defense lawyers said Buffett knew of the transaction. Buffett was never called to testify. He has denied wrongdoing.

Buffett may not address the case in his letter, but he will have much to say. Though when he does, including on succession plans, it's often a variation of things he has said before.

"I jump out of bed every morning and tap dance to work," he said in Toronto. "I'm having the time of my life."

He's long been spry for that two-mile journey. "I tap dance into work," Buffett once told the Washington Post in 1991.

New Outlook on Bond Firms Ignites Rally

Signs that two embattled bond insurance companies are getting close to restoring their reputations and credit ratings bolstered stocks on Monday.

The credit-rating firm Standard & Poor's helped incite a broad stock rally in the afternoon when it affirmed the triple-A ratings of MBIA and Ambac Financial, the two bond guarantors, saying the companies have made progress in raising capital and restructuring their businesses.

Since late last year, investors have worried that a downgrading of MBIA or Ambac could generate losses across Wall Street, because many investment banks and other large investors are counting on the firms to back bonds they own.

On Monday, Fitch Ratings, another rating firm, said a downgrading would be generally "manageable" but would severely pressure three banks that have struggled with big write-downs on mortgage-related securities: Citigroup, Merrill Lynch and UBS.

After being down as much as 3.1 percent in the morning, MBIA stock closed up nearly 20 percent. Ambac swung from a 4.2 percent decline to a 16 percent gain.

The Standard & Poor's 500-stock index rose 1.38 percent, or 18.69 points, to 1,371.80. The Dow Jones industrial average gained 189.20 points, or 1.53 percent, to 12,570.22. The Nasdaq composite index jumped 24.13 points, or 1.05 percent, to 2,327.48.

The S.& P. announcement surprised some investors, because it appeared to be based on little new information. The firm said MBIA was no longer on watch for a downgrading because it had raised $2.6 billion, but MBIA raised that sum over several months and closed on the last part of it nearly two weeks ago.

"This is a reprieve. It doesn't eliminate the problem," said Russ Koesterich, a strategist at Barclays Global Investors. "It just says, in the near term, this is not imminent."

In a letter to investors issued after the market closed, MBIA offered more details about how it planned to keep its triple-A rating. The company said it would not pay a dividend this year, saving it $174 million, and that it would split its insurance business into two subsidiaries over the next five years. One part would guarantee municipal bonds while the other would deal in more complex asset-backed securities that are tied to mortgages, credit card receivables and other debts.

In the letter, Joseph W. Brown Jr., who retook the chief executive and chairman titles at MBIA last week, also said the company would write no new insurance on securities backed by mortgages and other assets for six months. He warned that the company would probably take a big write-down in the first quarter related to insurance contracts on mortgage-related securities.

Ambac, like MBIA, is also moving to split its insurance business in two. But Ambac's plan appears to be on faster track.

The Wisconsin insurance commissioner, who regulates Ambac, said Monday that the company was close to a deal with a group of banks that it has been negotiating with for weeks. Ambac is considering splitting its insurance business and raising up to $3 billion.

The Wisconsin commissioner, Sean Dilweg, said Ambac could transfer a part of its current insurance portfolio to a subsidiary, Connie Lee, that already has licenses to operate in 47 states. One issue that Ambac is trying to resolve is whether securities backed by student loans will be part of the municipal business or the asset-backed business, Mr. Dilweg said. "They are working on a number of options," he said in a telephone interview.

In affirming Ambac's rating, S.& P. left the company on watch for a potential downgrading, noting the company's negotiations with the banks. A person who has been briefed on Ambac's negotiations said S.& P. and the other ratings firms, Moody's Investors Service and Fitch, were shown a draft plan over the weekend and are expected to pass judgment on it shortly.

Even as investors looked forward to the end of the turmoil surrounding the bond guarantors, there were signs that some companies remained troubled. On Monday, S.& P. downgraded the credit ratings of three other insurers, Financial Guaranty Insurance, XL Capital Assurance and XL Financial Assurance. And on Friday, Moody's downgraded Channel Reinsurance, a firm that reinsures about $43 billion of securities for MBIA, to Aa3, from triple-A.

MBIA unit's "Aaa" rating affirmed by Moody's

Moody's Investors Service on Tuesday dropped its immediate threat to cut the top "Aaa" rating of MBIA Inc's insurance unit, staving off the prospect of more bank losses and market declines.

While downgrades are still possible, especially if MBIA, the world's biggest bond insurer, splits its business lines, the latest action eased market concerns over rating downgrades of bond insurers and the debt they guarantee.

"The affirmation of triple A is a big shot in the arm for the entire industry," said Donald Light, an insurance analyst at Celent, a consulting firm in Boston. "It shows that somebody in the bond insurance industry can take a step back from the brink."

MBIA's shares rose 4.8 percent to $15.28. Shares of Ambac Financial Group Inc (ABK.N: Quote, Profile, Research), the No. 2 bond insurer, were down 1.8 percent at $12.19, a day after jumping 15.9 percent in the wake of reports it was near a deal to shore up its financial position.

If Moody's or S&P had stripped MBIA of its top ratings, bond markets could have been sent into turmoil and new bond issuance could have slowed, cutting into Moody's revenue.

The cost of protecting bond insurers' debt with credit default swaps narrowed on Tuesday on optimism some bond insurers can maintain their top ratings.

MBIA chief: We are not under pressure to split

Speculation over a coming business split for the biggest bond insurers has overlooked the different issues facing the companies, said the chief executive of the largest bond insurer Thursday.

People are confusing it," said Jay Brown, chairman and chief executive of MBIA Inc.in an interview Thursday. Some rivals "have not been able to raise capital, and have more significant capital needs than we have."

"Because of that, various institutional and public finance customers" have pushed for changes, Brown said. "They are working with regulators to determine if that is a way to stabilize" the business.

Brown took the helm just 10 days ago after leaving the company in 2007. His return came as the third-largest bond insurer Financial Guaranty Insurance Corp. made a request to insurance regulators that it be allowed to split its businesses in order to protect its municipal bond insurance business from the more shaky structured finance business that insured securities backed by subprime home mortgages.

Ambac Financial Group the second-largest insurer, has also spoken of the need for a split.

Both bond insurers have been hard hit by losses on guarantees they wrote on securities backed by subprime mortgages. Market concern over bond insurers' ability to pay off on potential claims has slowed business and threatened the top bond insurers' AAA credit ratings.

In recent weeks, Ambac has been in a struggle to raise capital in order to retain its AAA rating. One rating agency, Standard & Poor's reaffirmed Ambac's rating partly on the expectation that it would be able to raise the funds. MBIA's AAA rating was affirmed by both S&P and Moody's Investors Service this week.

n a Thursday research note, CreditSights analyst Rob Haines said that regulators had suggested to him that a restructuring plan for some insurers could be coming in weeks, rather than months or years.

But MBIA is in no hurry Brown said, partly because it raised capital earlier than its rivals, with a $500 million investment by Warburg Pincus, a $1 billion debt offering and a $1.1 billion shareholder rights offering, as well eliminating its dividend.

Although MBIA was able to raise capital, it was at "very expensive rates," Brown said, and he envisions a split as a way of making it simpler to raise capital in the future, if necessary.

"This is about the future, not today," Brown said. "Not a single regulator, no one I know of is asking us to split up. We have all the time in the world."

Shares of MBIA recently traded down 6.7% to $13.86.

Ambac Rescue Involves Others Besides Exposed Banks

The group of banks working to bail out Ambac Financial Group includes private equity and other financial firms that have no exposure to the troubled bond insurer, signaling optimism that Ambac will be able to make money in the future, CNBC has learned.

As reported, the group of banks--which includes Citigroup
Citigroup Inc  and Wachovia Group has worked out a framework to inject up to $3 billion in capital into Ambac. The bond insurer is in danger of losing its crucial triple A debt because of its exposure to risky subprime-related debt.

The banks are trying to save Ambac, as well as other bond insurers, because a ratings downgrade could force the banks themselves to write down billions more of their own debt that is backed by Ambac's insurance and current Triple A rating.

Though it's unclear the extent of the involvement by private equity and unexposed banks, the development is significant because it shows they expect to gain from investing in Ambac, not merely protect themselves from further losses.

The consortium of banks is now trying to sell the bailout plan to the rating agencies to save Ambac's triple-A rating. Rating agency approval is crucial because  bankers want to make sure that Ambac isn't downgraded after they put money into the  bond insurer.

Though Standard & Poor's reaffirmed Ambac's rating on Monday, the insurer is still under review and could be downgraded in the coming days until details of the proposed recapitalization are presented and approved.

The big rating agencies--which also include Moody's and Fitch --have been widely criticized for not catching the growing debt problems at the bond insurers earlier, so it's not out of the question that they will demand more capital be injected into Ambac.

Moody's and S&P, meanwhile, have reaffirmed the Triple A rating on MBIA, the nation's biggest bond insurer.

Rescue plans for troubled bond insurers

All eyes are on Wall Street's troubled bond insurance companies as they struggle to salvage their top-notch credit ratings and avert a broader financial crisis.

Credit-rating provider Standard & Poor's on Monday ended its downgrade review for MBIA Inc's top "AAA" rating, citing success by the largest U.S. bond insurer in raising new capital. The "AAA" ratings of Ambac Financial Group , the second largest insurer, were affirmed but remain on review for a downgrade.

The bond insurers, which guarantee payments on some $2.4 trillion of debt, are facing billions of dollars of expected losses from guarantees on risky subprime mortgage bonds.

Investors are spooked by potential rating downgrades because they could trigger a wave of forced selling of bonds the insurers have guaranteed, prompting more losses for Wall Street banks and lifting borrowing costs for consumers and city governments.

Stocks down on fear of bond insurance downgrades, weak economic readings

Worries about the bond insurance industry and rising levels of U.S. jobless insurance claims kept stock markets negative late Thursday morning.

The volatility on equity markets that started late in Wednesday's session after ratings agency Fitch cut its rating on bond insurer FGIC Corp. and its financial guaranty insurance subsidiaries pressured the Canadian dollar, which was down 1.19 cents to 99.49 cents US.

Toronto's S&P/TSX composite index was off a sharp triple-digit tumble, moving down 23.94 points late in the morning to 12,974.27. The junior TSX Venture Exchange was off 15.55 points to 2,539.83.

In economic news, Statistics Canada reported that economic activity increased 0.1 per cent in November.

On Wall Street, the Dow Jones industrials fell 47.88 points to 12,394.95. The Nasdaq composite index lost 11.92 points to 2,337.08 while the S&P 500 index gave back 6.07 points to 1,349.74.

The session got off to a sharply lower start after MBIA Inc., the world's largest bond insurer, reported writedowns of US$3.5 billion on souring credit derivatives in the fourth quarter, raising the possibility that it could lose its top credit rating.

And banks, which have already written down billions of dollars' worth of securities linked to mortgages, could find themselves having to take more writedowns tied to bonds insured by companies like MBIA.

The bond insurer concerns overshadowed the latest interest rate cut from the U.S. Federal Reserve and sent stock markets tumbling Thursday.

The Fed lowered its key funds rate by a half-point to three per cent, on top of last week's surprise reduction of three-quarters of a point, to help avert a recession in the United States.

There was no joy to be had from the latest economic data. The U.S. Commerce Department says American consumers spent less in December than at any time in the past 15 months.

It says spending edged up just 0.2 per cent in December, the year's peak shopping season, down sharply from a one per cent gain in November.

"There are serious headwinds against consumers right now, including tight credit conditions, rising energy prices, and slowing economic activity," said Charmaine Buskas, Senior Economics Strategist at TD Securities.

"All of these are expected to take a toll on consumption going forward."

That follows a report Wednesday that said the overall U.S. economy skidded to a near standstill in the October-December quarter, advancing at an anemic 0.6 per cent annual rate.

There was also glum employment news a day before the release of the January U.S. non-farms payroll report. U.S. jobless insurance claims rose 69,000 to 375,000 last week, the highest level since early October and the biggest gain since September 2005 in the wake of hurricane Katrina.

On the earnings front, web retailer Amazon.com reported that holiday-quarter profit more than doubled on revenue that jumped 42 per cent. But while it forecast stellar sales growth in the coming year and executives shrugged off concerns about the economy, its operating income guidance fell short of what analysts were expecting.

On the TSX, the energy sector lost 0.5 per cent as oil prices fell. The March contract on the New York Mercantile Exchange dropped $2.38 to US$89.95 a barrel. Canadian Natural Resources lost $1.31 to C$62.28.

Petro-Canada says its fourth-quarter profit jumped 36 per cent to $522 million. Net earnings in the quarter amounted to $1.08 a share.

Analysts' consensus forecast was for earnings of $1.32 a share, before one-time items, according to Thomson Financial. Petro-Canada shares dropped 88 cents to $46.17.

The financial sector was down 0.3 per cent, with Scotiabank down 37 cents to $47.26.

The gold sector was down 1.25 per cent as the April bullion contract on the New York Mercantile Exchange down 30 cents to US$926 an ounce.

Barrick Gold Corp. declined $1.16 to C$51.75. Shares in Iamgold Corp.  dropped 97 cents, or 10.6 per cent, to $8.13 after it said the French government is denying final permits needed to begin construction of its Camp Caiman project in French Guiana.

In other corporate news, Axcan Pharma Inc. says its first-quarter profit rose to US$22.3 million from a year-earlier $17.5 million as the drugmaker's revenue increased 17.9 per cent. During the quarter, Axcan announced it had entered into an agreement to be acquired by an affiliate of TPG Capital.

Axcan shares gained 23 cents to $22.77.

Lundin Mining Corp. is restating its financial results for the first three quarters of 2007 and expects to recognize a US$55-million reduction in reported net income.

Lundin said there has been misinterpretation of applicable tax legislation relating to tax rate reductions claimed by Somincor, the company's subsidiary in Portugal. Lundin shares were down 72 cents to $7.33.

Japan's Nikkei closed up 1.85 per cent.

London's FTSE 100 edged up 9.9 points to 5,847.2, Frankfurt's DAX moved down 57.03 points to 6,818.32 while the Paris CAC 40 was down 45.34 points to 4,828.23.

Ambac $3B Capital Infusion Might Not Be Enough

A potential $3 billion in new capital still might not be enough to keep Ambac Financial Group Inc. from being downgraded, a Bank of America Securities analyst said Monday.

"In our view, there is still a meaningful risk of downgrades for Ambac," analyst Tamara Kravec wrote in a research note. "Moreover, the question would remain: is $3 billion enough?"

Ambac could reach an agreement as early as Monday with a group of banks to provide capital to help the beleaguered bond insurer, the Wall Street Journal reported.

The Wall Street Journal said Ambac could raise about $3 billion as it looks to bolster its capital reserves to cover any potential spike in claims, as a portion of the bond insurance market is expected to sour.

Banks providing funding for the new capital raise could include Citigroup Inc., UBS AG , Wachovia Corp. and Royal Bank of Scotland Group PLC, the paper said.

Bond insurers pay out claims when issuers fail to make payments. Ratings agencies have worried in recent months that a sharp rise in defaults among mortgages could spark a wave of defaults among bonds backed by the troubled loans -- bonds insured by companies like Ambac. That rise in claims could become unmanageable for the insurers and has forced them to look for outside sources to raise cash to cover potential future defaults.

Fitch Ratings already downgraded Ambac from its crucial "AAA" financial strength rating. Moody's Investors Service said it would complete reviews of ratings on bond insurers by the end of the month.

Bond insurers essentially need a "AAA" rating to book new business.

Even if the capital is enough for Ambac to maintain its "AAA" ratings from Moody's and Standard & Poor's, it will be dilutive to shareholders.

"An equity capital raise of $2.5 billion would be about 20% to 25% dilutive to book value," Kravec wrote in the note.

Kravec maintains a "Neutral" rating on Ambac with a price target of $7.

Shares of Ambac rose 38 cents, or 3.6 percent to $11.09 in premarket trading.

Sovereign funds, Cerberus eye bond insurer stakes

Sovereign wealth funds and private equity firm Cerberus are looking at investing in bond insurers as the insurance companies try to raise money and hang onto their top ratings.

New York's state insurance superintendent said on Wednesday he has talked to sovereign wealth funds about potential investments in U.S. bond insurers. He declined to say if those conversations have ended or are continuing.

Separately, a person familiar with the matter said Cerberus Capital Management is in talks to invest in Ambac Financial Group Inc, the second-largest bond insurer.

The private equity firm has not signed anything, and discussions are still in progress, the person said. A Cerberus spokesman declined to comment.

Regulators, investors and banks are working closely with the bond insurers, who collectively guarantee more than $2.4 trillion of securities.

Financial markets are paying close attention to any potential deals because without new capital, the insurers may lose their top ratings. Rating downgrades could force investors to dump billions of dollars of bonds and lift borrowing rates for consumers and cities alike. Banks would also have to write down their exposure.

Investors Wait on Word of Ambac Rescue

Ambac Financial shares were edging higher early Monday, as investors await word of a reportedly imminent bailout deal from a consortium of banks.

Big money-center banks that have the greatest exposure to Ambac are said to be ponying up between $2 billion to $3 billion in a plan that would see it break itself into two halves, according to sources. One would house policies for conservative debt including municipal bonds, and another would backstop losses on structured debt, which is dropping in value due to the slumping mortgage market.

In a note Monday, Banc of America Securities analyst Tamara Kravec said that still might not be enough to stave off ratings downgrades, according to the Associated Press. A hit to the bond insurer's largely pristine rating -- already downgraded to double-A by Fitch Ratings -- could debilitate Ambac's ability to win new business.

"In our view, there is still a meaningful risk of downgrades for Ambac," Kravec wrote in the note. "Moreover, the question would remain: is $3 billion enough?"

Late Friday, CNBC first reported that a bank consortium that has been hashing over a bailout of Ambac over the past several weeks had begun to make "significant progress" that could see a plan come to fruition by as early as Monday. The television report sent stocks soaring to the close.

Such an Ambac breakup would likely bolster the staid muni bond exposures and help it retain its triple-A rating, while providing a backstop in the form of the capital infusion from the money-center banks that include Citigroup, Wachovia Bank, Barclays Capital, UBS, Royal Bank of Scotland, BNP Paribas and Société Générale.

Ambac shares recently were up 2% to $10.92

Wilbur Ross eyes bond insurance announcement soon

The billionaire investor Wilbur Ross said on Wednesday he expects within a few days to have an announcement regarding plans for his involvement in the troubled bond insurance industry.

Ross, known for making investments in distressed companies, has been reported to have been in talks with Ambac Financial Group Inc. He told  earlier this month that he was more likely to invest in a bond insurer than start one.

"We'll have an announcement within the next few days," Ross said on the sidelines of a conference in New York.

MBIA moves to help stability in credit markets

MBIA Inc, the world's largest bond insurer, said it will stop guaranteeing asset-backed securities for six months and plans to split that business from its municipal bond unit, moves aimed at restoring stability in troubled credit markets.

The decision was announced after Standard & Poor's earlier on Monday said it would not cut the company's top-tier credit ratings, causing MBIA shares to rally 19.7 percent and prompting a broader stock market rally.

S&P said it had grown more confident that MBIA could raise capital after the insurer sold some $2.6 billion of debt and equity this year.

MBIA on Monday also eliminated its dividend.

Joseph "Jay" Brown, MBIA's new chief executive, said in a letter to shareholders that he suspended the writing of new structured finance business for about six months, while the company evaluates its options.

He also said he plans within a five-year period to separate the Armonk, New York-based company's municipal and structured finance businesses. Brown had told Reuters last week that he would like to have the units operate separately underneath the company's holding company.

Eliminating the dividend would save about $174 million a year, he said on Monday.

S&P

S&P said it was no longer reviewing MBIA's "AAA" rating for downgrade, but said the outlook was "negative" because of the size of potential losses relative to the insurer's capital.

Moody's Investors Service and Fitch are both still considering cutting the top ratings for MBIA Insurance Corp, the company's main operating unit.

S&P said the main unit at Ambac Financial Group Inc, MBIA's largest rival, may still lose its top ratings.

Source - Reuters

http://www.reuters.com/article/ousiv/idUSN2538468020080226

Yen Falls as S&P Maintains AAA Credit Rating for Bond Insurers

The yen fell to a two-month low against the New Zealand dollar after Standard & Poor's kept AAA debt ratings on the two largest U.S. bond insurers, encouraging traders to buy higher-yielding assets funded with loans in Japan.

The yen traded close to a six-week low against the euro after S&P maintained its ratings on MBIA Inc. and Ambac Financial Group Inc., encouraging so-called carry trades. New Zealand's dollar rose to the highest since being allowed to trade freely in 1985 against the U.S. currency on speculation accelerating inflation will prompt the central bank to keep its benchmark interest rate at a record of 8.25 percent.

``Stocks should be firm,'' said Hiroshi Yoshida, a foreign- exchange trader in Tokyo at Shinkin Central Bank, Japan's fifth- largest publicly traded lender by assets. ``I expect the yen to weaken.''

The yen fell to 88.12 against the New Zealand dollar, the lowest since Dec. 27, before trading at 88.04 at 9:36 a.m. in Tokyo from 87.71 late yesterday. Japan's currency was quoted at 160.32 per euro after touching 160.43 yesterday, the lowest since Jan. 15. The yen held at 108.08 per dollar, after declining 0.8 percent yesterday. The euro was little changed at $1.4833.

The yen fell to a three-month low of 100.35 against the Australian dollar and declined to 14.1435 per South African rand from 14.0949. The Nikkei 225 Stock Average rose 0.7 percent on confidence the two insurers will be able to guarantee debt and provide a AAA-ranking for $1.2 trillion of securities.

Rate Spread

The New Zealand dollar rose as much as 0.9 percent to 81.52 U.S. cents today, before trading at 81.44 U.S. cents. The New Zealand dollar may rise above the 23-year high should a central bank report today forecast inflation will remain above 3 percent in two years, said Alex Sinton, senior currency dealer at ANZ National Bank Ltd. in Auckland.

``We've seen a trend back to yield,'' said Meg Browne, a currency strategist at Brown Brothers Harriman & Co. in New York. ``The central bank is unlikely to shift to rate cutting, and that's seen money flow back to the kiwi,'' she said, referring to New Zealand's dollar by its nickname.

Japan's benchmark rate of 0.5 percent, the lowest among industrialized nations, compares with 7 percent in Australia, 4 percent in Europe and 11 percent in South Africa.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher rates, earning the spread between the two. The risk is that currency moves erase those profits.

Business Confidence

Any gains for the euro may be limited before a report today that will probably show German business confidence probably fell to a two-year low in February. The Ifo institute's sentiment index slipped to 102.9 from 103.4 in January, according to the median of 45 forecasts in a Bloomberg News survey.

``I am bearish on the euro, as the European economy looks murky to me,'' said Kenichiro Fujita, manager of derivatives- marketing in Tokyo at Aozora Bank Ltd., Japan's ninth-largest publicly traded lender by assets. ``A slowdown in the U.S. will slow Europe's economic growth.''

The single currency may fall to $1.4780 against the dollar today, Fujita forecast.

The European Central bank will lower its main lending rate from a six-year high of 4 percent to 3.75 percent by midyear and to 3.5 percent by year-end, according to the weighted average of 24 forecasts in a Bloomberg survey.

Japan Stocks Rise, Led by Insurers; Inpex Gains on China Report

Japanese shares climbed, with a gauge of insurers advancing the most in more than four years after reporting better-than-expected earnings.

Aioi Insurance Co. soared the most in more than four years. Shares also rose on speculation U.S. bond insurer Ambac Financial Group Inc. will retain its credit rating, curtailing writedowns for financial companies. Inpex Holdings Inc. climbed after a report China's state-owned fund plans to buy a stake in it.

``Losses at Japan's insurance companies are smaller than for their overseas counterparts, encouraging investors to pile back in to their shares,'' said Yoshihiro Okumura, who helps oversee the equivalent of $365 million at Tokyo-based Chiba-gin Asset Management Co. The rescue plan for Ambac ``boosts investors' confidence a chain reaction of subprime losses will be averted.''

Sharp Corp., Japan's biggest liquid-crystal display maker, climbed the most in two weeks, pacing electronics makers' gains. Sony Corp. rose to a three-week high. Mitsubishi Heavy Industries Ltd. advanced after saying it's in talks to launch satellites.

The Nikkei 225 Stock Average gained 414.11, or 3.1 percent, to 13,914.57 at the close in Tokyo. The broader Topix index rose 34.17, or 2.6 percent, to 1,355.54. All of the 33 industry groups on the Topix rose.

Aioi surged 14 percent, the biggest advance since October 2003, to 513 yen. Mitsui Sumitomo Insurance Co., the nation's second-largest casualty insurance company, leaped 10 percent, the biggest gain since August 1999, to 1,107 yen.

The Topix Insurance Index jumped 8.1 percent, the biggest advance since October 2003. Other financial companies also climbed, with a benchmark of consumer lenders adding 4.6 percent and a gauge for banks rising 4.1 percent.

Loss Forecast

On Feb. 22, Aioi said subprime-related losses totaled 67.5 billion yen ($629 million) as of Dec. 31, prompting the company to forecast a net loss, compared with an earlier estimate of profit. The Nikkei newspaper had said the Tokyo-based company would report about 90 billion yen in subprime-related losses.

Japan's five biggest casualty insurers reported combined net income of 266.4 billion yen last week for the nine months ended Dec. 31, exceeding their total profit forecast of 240 billion yen for the year to March 31, based on calculations by Bloomberg News.

Ambac, the world's second-largest bond insurer, may receive $3 billion as part of a rescue agreement with banks, according to a person with knowledge of the discussions. A credit downgrade may trigger writedowns among global financial institutions.

China Investment

Inpex, Japan's biggest oil explorer, climbed 7.9 percent after the London-based Times reported China Investment Corp. plans to buy a ``sizable stake'' in the company and is recruiting in Japan to find a local fund manager.

China will allow its commercial banks to invest in Japanese stocks and funds, the China Banking Regulatory Commission said on its Web site on Feb. 22.

Sharp rose 5.2 percent after the Nikkei newspaper said Sony Corp. plans to buy television panels from the company to meet increasing demand and cut costs. Sony added 2.4 percent. Pioneer Corp., Japan's third-largest maker of plasma television, rallied 4.3 percent after the Asahi newspaper said the company is likely to end production of plasma display panels smaller than 42 class.

Mitsubishi Heavy, Asia's largest aerospace company, added 7.5 percent after saying it may win orders to launch commercial satellite using its H-2A rocket. Sumitomo Heavy Industries Ltd. surged 9.5 percent, while Komatsu Ltd. gained 3.7 percent.

Nikkei futures expiring in March advanced 2.9 percent to 13,890 in Osaka and climbed 2.9 percent to 13,875 in Singapore.

Ambac rescue may be announced Monday or Tuesday

A rescue for bond insurer Ambac Financial Group Inc may be announced on Monday or Tuesday, a person familiar with the matter said on Friday.

Ambac, facing billions of dollars of expected losses from guaranteeing repackaged subprime mortgages, is talking to banks and regulators about raising extra capital to keep its top credit ratings.

A deal has not yet been signed, and may still fall through, but talks with banks including Citigroup Inc, UBS AG and Wachovia Corp are advancing, although there are still details to be worked out.

Investors fear that Ambac will lose its top credit ratings from Moody's and Standard & Poor's, forcing investors to sell billions of dollars of securities and lifting borrowing costs for consumers and city governments. U.S. stocks, which had been in negative territory for most of the session, turned positive after the prospect of an Ambac rescue was initially reported by CNBC television.

Ambac shares rose 16 percent to close at $10.71 on the New York Stock Exchange, but the second-largest U.S. bond insurer's shares have fallen 88 percent since the start of 2007.

The U.S. bond insurance industry, which guarantees some $2.4 trillion of debt, is broadly looking to raise new capital and reorganize as expected losses have mounted. The insurers originally focused mainly on insuring bonds issued by state and local governments, but have lost big after the foray into guaranteeing repackaged consumer debt and other complicated instruments.

At least two bond insurers, MBIA Inc and FGIC Corp, have announced plans to divide their municipal bond insurance businesses from their other insurance operations. Ambac may follow a similar path, people familiar with the situation said.

The New York Times reported in Saturday editions that Ambac plans to split itself in two and hopes to raise $3 billion to bolster its finances, citing a person who had seen the plans and spoke on Friday. An announcement could come as early as Monday, the newspaper added.

Municipal bond sell-off persists amid worries about insurers

News of a possible rescue of ailing bond insurance giant Ambac Financial Group came too late Friday to stave off another sell-off in municipal bonds.

The tax-free annualized yield on a Bloomberg News index of 20-year California general obligation bonds jumped to the highest since June 2004, reaching 5.05% compared with 5% on Thursday and 4.84% a week earlier.

The yield on the Bond Buyer index of 40 muni securities nationwide rose to 5.01%, up from 4.98% on Thursday and the highest since August.

Munis have been hurt, in part, by fears that bond insurers, which insure about half the muni market, might lose their AAA credit ratings because of losses they face on mortgage bonds they've backed.

What's more, nervous investors have pulled back from the so-called auction-rate bond market, which is used by many municipalities to borrow via floating-rate securities. California and other issuers have said they would stop using that market and shift borrowing to conventional bonds.

As some investors have dumped munis in recent weeks, share prices of many muni bond mutual funds have fallen. The Franklin California Tax-Free fund slid to $7.09 a share Friday, a six-month low. It has fallen 1.9% in two weeks.

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http://www.latimes.com/business/la-fi-munis23feb23,1,393135.story

Ambac - Bond Insurer Plans a Split to Protect Ratings

Ambac Financial Group, the embattled bond insurance company, plans to split itself in two in a bid to safeguard its top credit ratings and avert losses on securities that it guarantees for big banks.

The company also hopes to raise $3 billion to bolster its finances, a person who has seen Ambac's plans said Friday. An announcement could come as early as Monday, assuming credit ratings agencies approve the measures.

News of the breakup plan, first reported by CNBC, sent the stock market soaring Friday afternoon. The Standard & Poor's 500-stock index closed up 0.8 percent after being down as much as 1.2 percent earlier in the day. Financial shares paced the gains.

Shares of Ambac jumped $1.48, or 16 percent, to $10.71. MBIA, a rival that has said it is considering a similar breakup plan, rose 2.4 percent, to $12.18.

Under Ambac's plan, one part of the company would guarantee relatively safe municipal bonds, while the other would insure more complex securities backed by mortgages and other debt. In all, Ambac guarantees about $556.2 billion of securities.

The company also hopes to raise $2.5 billion through a rights offering to its existing shareholders; the sale will be backed by banks. Ambac also plans to raise roughly $500 million in new debt, according to the person who has seen the plan, who was not authorized to talk about it.

The banks, which include Citigroup and UBS, delivered a draft of the plan to Ambac and credit ratings agencies on Friday, and the company is expected to give its formal consent soon. Officials involved in drafting the plan hope the two new subsidiaries will both receive triple-A ratings, though the firm backing mortgage-related bonds could be rated slightly lower.

Fitch Ratings has already downgraded Ambac's insurance business to double-A, though Moody's Investors Service and Standard & Poor's still rate the firm triple-A.

A spokeswoman for Ambac, Vandana Sharma, declined to comment on details of the plans. "We continue to be in active negotiations as part of a lot of alternatives, which include a capital raise to stabilize our rating," she said.

A spokesman for Eric R. Dinallo, the New York insurance superintendent, also declined to discuss the plan, but issued a statement suggesting progress was being made. In January, Mr. Dinallo asked leading banks to inject more capital or provide lines of credit to the bond guarantors that would allow them to keep their top ratings.

"As insurance regulators, it is our responsibility to protect policyholders and ensure a healthy, competitive market for insurance products, and we are encouraged by any developments that further these goals in this important market," the spokesman, Andy Mais, said.

The idea of dividing the bond insurance companies has gained steam quickly. Just last week, Gov. Eliot Spitzer of New York told a Congressional committee that such a step would be pursued as a last resort if banks and the insurers could not come up with another solution.

A day after Mr. Spitzer spoke, a smaller bond guarantor, Financial Guaranty Insurance Company, told New York regulators it would split its business in two. And this week, MBIA replaced its top executive with a former official who quickly endorsed the idea for that company.

In embracing a split, the bond guarantors are tacitly admitting that their expansion into complex asset-backed securities has not gone well. Created in the 1970s, the insurance companies initially specialized in guaranteeing interest and principal payments on municipal debt that rarely defaulted. Today, about half of the $2.6 trillion municipal bond market is insured.

But in the 1990s, as competition squeezed their profit margins, Ambac, MBIA and others moved to back bonds that were secured by mortgages, credit card receivables and other assets. During the recent housing boom, the companies also guaranteed more complex collateralized debt obligations, which are backed by portfolios of bonds.

As defaults on mortgages and other debts have risen, investors and credit rating firms have begun to question whether guarantors have enough reserves to pay claims on their insurance contracts, particularly those backing mortgage-related securities.

MBIA has raised $2.5 billion in the last four months, but Ambac has not yet raised any capital. In January, Ambac's board replaced its chief executive because of a disagreement about whether the company needed more capital. Last week, the company also replaced its chief risk officer and other senior executives.

A split of the insurance business would help the companies by allowing them to resume insuring municipal bonds, something the companies have been unable to do in recent months because investors have lost confidence in them.

In the mortgage-related business, the companies are expected to manage existing contracts but not write many new policies, at least in the foreseeable future. That business is expected to be backed by relatively more capital than the municipal firm to account for higher future losses.

The plan to shore up the guarantors is also critical for banks like Citibank, UBS and Merrill Lynch. If the firm that insures their collateralized debt obligations and other securities does not have a high credit rating and substantial capital, the banks would have to acknowledge substantial losses in their portfolios.

Moody's estimates that 20 banks could collectively have to increase their reserves by $7 billion to $30 billion if the bond guarantors were downgraded.

Treasury optimistic on Bond Insurance

The U.S. Treasury Department is optimistic that problems in bond insurance will be worked out and progress is being made, a senior Treasury official said on Thursday.

Treasury Undersecretary for Domestic Finance Robert Steel said that he was encouraged that various groups with an interest in the bond insurance market -- from the New York state insurance regulator to the insurers -- are communicating.

"It's a good long list of people who are adjacent to this issue. The good news is that it seems all of those people are speaking," he said. "There are lots of incentives for people to figure this out, and it seems to my mind, progress is being made and ideas are being shared."

"Assuming that these are going to be ongoing entities, then they'll need to have fresh capital," he said.

Having insurance companies increase their capital has been suggested as one solution to the problems triggered when ratings agencies lowered or threatened to lower the major bond insurers' "AAA" ratings.

Another option presented by New York Insurance Superintendent Eric Dinallo has been to create a "good bank-bad bank plan" that would split the companies' healthier municipal bond insurance from its more troubled enterprise of backing mortgage debt.

Ackman proposes one way to split up bond insurers

 
Bill Ackman, head of hedge fund firm Pershing Square Capital Management LP, has proposed a way to split up struggling bond insurers that he said would protect municipal bond policyholders and could help pay claims on more troubled structured finance guarantees.

Ackman, who has been betting against shares of leading bond insurers Ambac Financial, sent the proposal to the New York State Insurance Department late Tuesday.

Though,MBIA spurned the idea, arguing it is mainly designed to boost Ackman's negative bets against MBIA and Ambac.

The plan reportedly got a lukewarm reception from the regulator. Rating agencies Moody's Investors Service and Fitch Ratings didn't respond to requests for comments on Wednesday. Standard & Poor's declined to comment.

Bond insurers agree to pay interest and principal on debt in a timely manner in the event of default. The $2.4 trillion business relies on AAA ratings to win new business. Those top ratings are in jeopardy now because of concerns insurers like Ambac and MBIA will have to pay big claims from guarantees they sold on complex mortgage-related securities known as collateralized debt obligations (CDOs).

f the situation gets bad enough, regulators including Dinallo are considering splitting bond insurers in two. That would separate their steady muni bond businesses from the more troubled structured finance units, which are being pummeled by CDO exposures.
Indeed, FGIC, a big rival of Ambac and MBIA, submitted a plan with some of those attributes last week.

However, splitting up bond insurers would be difficult, pitting policyholders against shareholders of the bond insurer holding companies.

Bond Insurer FGIC Plans to Split in Two

FGIC Corp, a bond insurer that has lost its top credit ratings, has told New York regulators it wants to split into two companies, a spokesman for the state insurance regulator said on Friday.

The move is the latest step in the rescue of the U.S. bond insurance industry, which is expected to make billions of dollars of payouts in coming years after insuring bonds linked to subprime mortgage bonds and other risky debt.

FGIC, whose owners include private equity giant Blackstone Group LP, plans to apply to create a new insurance company, into which it would move its municipal bond insurance operations, New York Insurance Department spokesman David Neustadt said.

FGIC's structured finance business -- which guarantees repackaged consumer loans and other debt, and is expected to make big payouts in coming years -- would remain in the current company.

Source :- Reuters.com (Reuters, New York)

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http://www.reuters.com/article/bankingFinancial/idUSN1555403820080218

Warren Buffett enters the bond-insurance business

Warren Buffet's Berkshire Hathaway is entering the bond insurance market and is likely to lure business from established rivals Ambac Financial Group Inc and MBIA Inc which are struggling with the credit market turmoil. Named Berkshire Hathaway Assurance Corp, the new insurer has received a license to operate from New York State's insurance department and plans to expand the unit into California, Florida, Illinois, Texas and Puerto Rico. Municipal issuers finance such things as hospitals, road construction, schools, sewer systems and sports facilities. Berkshire Hathaway, which has a "triple-A" credit rating, expects the new unit to earn the same rating.