Buffett's Move Raises a Red Flag

Wall Street Journal ^ | August 21, 2012 | SERENA NG And MICHAEL CORKERY

[Second Amendment First]

A decision by Warren Buffett's Berkshire Hathaway Inc. BRKB -0.15% to end a large wager on the municipal-bond market is deepening questions from some investors about the risks of buying debt issued by cities, states and other public entities.

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.

Warren Buffett's Berkshire Hathaway recently canceled credit-default swaps insuring $8.25 billion of municipal debt. . Details of the termination, with the Lehman Brothers estate, weren't disclosed. It isn't clear whether Berkshire's move will leave the company with a profit or loss on the wager. Mr. Buffett, Berkshire's 81-year-old chairman and chief executive, declined to comment.

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.

[Second Amendment First]

So much for Hope and Change. He's buying his way out of a bad position, as more local governments go belly up.

[Buckeye McFrog]

They had everything riding on a wave of Federal bailouts in an Obama second term. But those prospects are suddenly looking iffy.

[gov_bean_ counter]

Oh shoot. I was hoping he would buy up a couple of lib cities and move them to China...

[Second Amendment First]

LOL

I like that idea better than Bloomberg’s vision of immigrants resettling those places in exchange for citizenship.

[Presbyterian Reporter]

The Wall Street Journal is not the source of accurate news as it once was.

I would think the Lehman Bros. estate has sold most of the $8.5 billion of municipal bonds it held in order to pay off other debts.

Thus, Buffet is no longer needed to provide a credit default insurance.

Buffet originally got $162 million from Lehman for the credit default insurance. Buffet likely paid the Lehman estate $10 million to cancel the insurance.

Nice profit for Buffet and incorrect story for WSJ.