Devoted to Managers and those that seek to improve their management skills

The entrance of bond insurers into riskier ventures over the recent years has brought them to a place of doubtful ability to pay out if defaults continue to rise.

Formerly bond insurers would focus for the most part on municipal bonds, but they decided to drive more profitability by insuring bonds that were backed by mortgage pools - specifically subprime loans. Now the concern is bonds will default as the growing loan defaults backing them continue to rise.

Warren Buffett has stepped into the fray by offering reinsurance to major bond insurers MBIA Inc. (NYSE:MBI), Ambac Financial Group Inc. (NYSE:ABK) and Financial Guaranty Insurance Co. The reinsurance offer would cover somewhere around $800 billion in municipal bonds. The offer doesn't extend beyond municipals. Buffett said on CNBC (NYSE:GE) that one company has rejected the offer, while he's waiting on the response of the other two.
  
Both Ambac and Financial Guarantee have been fighting being downgraded in the last month by rating agencies because they don't have the capital to ensure the valuable "AAA" financial rating. The high rating is needed to book new business by the insurance companies.

According to Buffett, accepting his offer would allow the bonds to sell for a fair price, as now they are selling at significant discounts because of the weakened financial position of the bond insurers.

Buffett also says that he's seeing insured bonds for less than uninsured bonds.

"So the insurance in the market is presently not doing the bondholders a bit of good, and in fact in some cases it's even penalizing the price below that of other bonds," Buffett said.

The offer Buffett made to the companies was to reinsure their municipal bonds for a fee that would be 1.5 times what remains on the unearned premium over the duration of the bonds. That plus a $3 billion fee would come to about $9 billion if the deal were accepted. Unearned premiums is money already collected by the insurers from policyholders of municipal bonds, but haven't been paid in claims or put forth as revenue.

Those insuring bonds will pay a bondholder if the one issuing the bond defaults. Reinsurance is offered to the bond insurers to partially or completely insure the risk they've assumed.