Message received loud and clear, Warren. In a move that should give genuine concern to investors in U.S. municipal bonds, Warren Buffett’s Berkshire Hathaway (NYS: BRK.A) (NYS: BRK.B) has terminated insurance contracts it sold against default on $8.25 billion in state and municipal debt — half the total exposure it was carrying at the end of June. But that’s not half of the story.
Did Buffett eat a loss?
Indeed, given a free hand, Berkshire might have eliminated its exposure altogether; alas, according to its most recent quarterly report, the remaining contracts do not permit termination prior to the maturity of the underlying obligations, which ranges from 2012 to 2054.
Worse still, it appears that Berkshire may have been willing to eat a loss on the contracts in order to close them out. According to The Wall Street Journal, Berkshire originally sold the insurance on $8.25 billion in bonds from 14 states, including Texas, Florida, California, and Illinois, in 2007. As the Journal story explains: “[The] cost of insuring the states from default, however, is now much higher than in 2007, according to data provider Markit.”
Whether or not they ultimately come to the same conclusion as Buffett, investors who own a muni mutual fund or ETF such as the iShares S&P National AMT-Free Municipal Bond Fund (NYS: MUB) or the SPDR Barclays Capital Municipal Bond ETF (NYS: TFI) are well advised to reassess their exposure.
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