Buffett Puts The Screws To The Banks (C)(ABK)(MBI)

Eric Dinallo, New York State’s insurance regulator, is a clever devil. He has effectively pitted Warren Buffett against the nation’s biggest money center banks to see who will get the chance to rescue the bond insurance companies. Mr. Buffett’s proposal was probably alway a non-starter. He wanted to cover the underwriting of muni-bonds for companies like Ambac (ABK) and MBIA (MBI) and leave them to their own fates when it comes to the CDOs and other mortgage-related securities on their balance sheets.

Mr. Buffett may simply be a stalking horse for Dinallo. What is really needed is a full bail-out and the only group which has an incentive to do that is money center banks like Citigroup (C). Banks hold paper backed by the insurers. If rating drops on the insurers driving down the value of bonds, banks could face another round of lay-offs. As the FT writes "different groups of banks are working with bond insurers, with the groups formed reflecting the banks’ exposure to each insurer."

Because the banks have capital problems of their own, they are not ideally suited to help the insurers. And, they may have been dragging their feet. By ushering Buffett onto the stage, regulators have put the screws to the banks.

Douglas A. McIntyre