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Buffett gets into bond insurance

Allan Sloan is a senior editor-at-large at Fortune

TEXT OF INTERVIEW

Scott Jagow: New York state's plan to rescue bond insurance companies might come up a bit short. The state is asking Wall Street banks to chip in $15 billion to help bond insurers keep their top credit rating. But analysts say those insurers actually need about $200 billion. At the same time, Warren Buffett has decided to get into the bond insurance business.

Let's run all this by Fortune Magazine's Allan Sloan. Allan, first of all, what happened to these bond insurers, like Ambac and MBIA?

Allan Sloan: Well, they took what had become a slow-growing but very lucrative business, insuring municipal bonds, and these are companies that have publicly traded stock. And you know, Scott, if you're publicly trading stocks, your earnings are supposed to go up every quarter, every year -- possibly every minute. And since you couldn't do that any more with municipal bonds, they said, well gee, we have an expertise in understanding financial risk. And they diversified, and ended up diversifying into things like junk mortgages, collateralized debt obligations, stuff like that -- which have all now blown up and are threatening to eat them alive.

Jagow: And why can Buffett do better than the companies that we're talking about here?

Sloan: Ambac and MBIA are what's known as monoline companies -- they did one thing. If you pull out the Berkshire/Hathaway annual report and actually try to read it, you will go mad. Because it has a zillion businesses -- it has large insurance businesses, it owns entire companies, it owns parts of companies. And all Buffett cares about is making the company as a whole profitable and productive. He can just stay in the bond business, and if the cycle turns once the premiums go down, well, he could just get out of it, because his bond business isn't subject to Wall Street, and he doesn't have to show Wall Street that his profits from insuring muni bonds increase every quarter. He's not wed entirely to this business, so he can be in it when things are good and can put it into sleep mode when things are not quite so good.

Jagow: So could Buffett be creating a new model here for operating the bond insurance business?

Sloan: Sure. Again, in theory, this is a business that's better owned by a conglomerate that doesn't have to push it. The thing about Berkshire is it's constantly getting bigger, it's got tons and tons of money, and Buffett does what Buffett wants. And Buffett doesn't care what Wall Street wants. And it's worked very, very well for everybody, including him and including guys like me who own stock in it.

Jagow: All right. Allan Sloan from Fortune Magazine. Thank you.

Sloan: You're welcome. Have a good day, Scott.

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