NEW YORK - Town governments, school districts and other municipalities looking to borrow money got a new option yesterday for insuring their bonds: billionaire investor Warren Buffett.
He announced the formation of a bond insurance company and provided some validation to an industry that has been battered by fears of collapse in recent weeks.
Though analysts said Buffett's move provided a stamp of approval for the broader business model, which recently has come under fire, shares of his newest competitors were hammered yesterday.
"Any capital new to the space for reinsurance would be a net positive," Steve Stelmach, an analyst with Friedman, Billings, Ramsey & Co., said in an interview. But if Buffett "uses capital simply as competition, it is a negative," Stelmach said.
Shares of MBIA Inc. fell 15.9 percent to $18.74 on the New York Stock Exchange, and Ambac Financial Group Inc. fell 13.8 percent to $25.12.
The New York Insurance Department expedited licensing for Buffett's Berkshire Hathaway Assurance Corp. The state's insurance superintendent said the state was trying to help insurers win regulatory approvals needed to keep their businesses going.
Buffett's foray into the bond insurance sector comes at a tumultuous time in the industry. Bond insurers recently have come under fire as rating agencies have downgraded them, or warned of possible downgrades, because of their exposure to the deteriorating credit markets.
Typically, bond insurers carry better credit ratings than bond issuers such as local governments, allowing the issuers to receive more favorable interest rates on their debt. That, in turn, allows the bond issuers to pass on the savings to taxpayers.
But now, rating agencies are worried the insurers will not have enough money to cover potential defaults on bonds and debt backed by mortgages, notably subprime mortgages given to customers with poor credit history.