Buffett Floats Bond Insurer Bailout

Updated from 8:40 a.m. EST

Billionaire superinvestor Warren Buffett on Tuesday said he has made an offer to reinsure $800 billion municipal bonds guaranteed by the three biggest bond insurers, a once obscure corner of the financial sector whose recent troubles threatened to wreak major damage to the wider stock market.

Buffett, in an interview on CNBC, said his Berkshire Hathaway(BRK.A - Cramer's Take - Stockpickr) has offered to backstop municipal bonds held by MBIA(MBI - Cramer's Take - Stockpickr), Ambac(ABK - Cramer's Take - Stockpickr) and closely held Financial Guarantee Insurance Co.

Buffett, the so-called Oracle of Omaha, said he made the offer last week and gave the insurers 30 days to seek out a better offer. He said one of the insurers, which he wouldn't name, already turned him down and the two others have not yet responded.

The three bond insurers have faced volatile stock prices and a flurry of questions about their ability to pay potential claims, as they've been hit with a rash of ratings warnings and downgrades.

Pristine triple-A ratings are critical for the insurers' core business of guaranteeing corporate and municipal debt. If the bond insurers are downgraded, trillions of dollars in bonds they backstop also are at risk for downgrade, making them unsuitable for many large institutional investors.

The firms ran afoul of the ratings agencies by choosing to backstop esoteric collateralized debt obligations pooling mortgages and other risky debt, which have seen increasing defaults as the housing and credit bubbles burst in the second half of 2007.

MBIA shares were down 2.3% to $13.27, and Ambac was up 1.3% at $10.62 in early New York trading.