Wall Street up as Buffett offers $800b bond cover

New York : Billionaire investor Warren Buffett said on Tuesday he has made an offer to the three top bond insurers to reinsure $800 billion in municipal bonds, but one of the struggling companies has rebuffed the plan while the other two have yet to respond.

Buffett, chairman and CEO of Berkshire Hathaway Inc, told CNBC television that he made the offer to MBIA, Ambac Financial Group and FGIC, which is owned by a consortium of investors including Blackstone Group LP.

Stocks rallied broadly on the news, which may have allayed fears that rating downgrades would force investors to sell billions of dollars in bonds issued by cities and states - raising borrowing costs for municipalities, and potentially boosting taxes for taxpayers.

A spike in defaults in the coming months could force the insurers to pay billions of dollars in claims.

Late last year, Berkshire launched its own bond insurance business to take advantage of the credit problems other bond insurers have had.

Berkshire's new bond insuring division has a 'AAA' credit rating. Buffett has said Berkshire's new company already has done a couple of deals insuring municipal bonds.

Some bond insurers, such as Ambac and FGIC, have been downgraded by ratings agencies in the past month as they have been unable or chosen not to raise capital to ensure their vital 'AAA' financial strength rating.

$30b Fed auction

Meanwhile, the Federal Reserve, seeking to combat the effects of a serious credit crisis, said yesterday it had auctioned $30 billion in funds to commercial banks at an interest rate of 3.010 per cent.

It marked the fifth in a series of auctions that so far have pumped $130 billion in money into the US banking system in affort to provide cash-strapped banks with extra reserves.

The Fed's hope is that the increased resources will keep banks lending and prevent a severe credit squeeze from making the current economic slowdown worse.

The latest auction results showed that the Fed's effort is having success. The 3.010 per cent interest rate is the lowest rate for any of the five auctions held so far.