Buffett Joins Team Whitney; Sees Muni Pain Ahead As He Unwinds Half Of His Bullish CDS Exposure Prematurely

Tyler Durden's picture

Just under two years ago, Meredith Whitney made a much maligned, if very vocal call, that hundreds of US municipalities will file for bankruptcy. She also put a timestamp on the call, which in retrospect was her downfall, because while she will ultimately proven 100% correct about the actual event, the fact that she was off temporally (making it seem like a trading call instead of a fundamental observation) merely had a dilutive impact of the statement. As a result she was initially taken seriously, causing a big hit to the muni market, only to be largely ignored subsequently even following several prominent California bankruptcies. This is all about to change as none other than Warren Buffett has slashed half of his entire municipal exposure, in what the WSJ has dubbed a "red flag" for the municipal-bond market. Perhaps another way of calling it is the second coming of Meredith Whitney's muni call, this time however from an institutionalized permabull.

In bad news for the bullish muni community, the Octogenarian of Omaha has terminated $8.25 billion worth of sold municipal insurance (or half of his total, the balance of which he is unable to terminate, or technically, novate, due to timing limitations), a move which the WSJ says "indicates that one of the world's savviest investors has doubts about the state of municipal finances. If so, the move could be a warning to investors who have purchased such debt. In canceling the contracts early, Mr. Buffett probably "doesn't want this exposure anymore and is getting out while he can," said Jeff Matthews, a hedge-fund manager who personally owns Berkshire shares."

In what is worse news for the bullish muni community, the fact that Buffett closed the position at substantial losses indicates that the once deified investor is willing to swallow his pride, and despite his massive balance sheet, refuses to wait out the expiration of the insurance, implying he sees not only major shockwaves ahead, but turbulence that is imminent (if only M-Dub had waited until now). What is worst, is that Buffett's bearish move comes at a very fragile time for the muni market: weeks after three consecutive bankruptcies shook California, and just as various other cities are contemplating strategies to impair bondholders (a la Greece and Belize) to avoid all out Chapter 9.

From the WSJ:

The insurance-like contracts, which required Berkshire to pay in the event of bond defaults, were originally purchased by Lehman Brothers Holdings Inc. in 2007, more than a year before the Wall Street firm filed for bankruptcy, the person said.


Details of the termination, with the Lehman Brothers estate, weren't disclosed. It isn't clear whether Berkshire's move will leave the company with a profit or loss on the wager. Mr. Buffett, Berkshire's 81-year-old chairman and chief executive, declined to comment.

Actually, assuming the following chart from the WSJ is correct, it is fairly safe to assume that Buffett will close out with a substantial loss. Having sold over $8 billion in insurance on what appears to be 10 year duration CDS at 20 bps, the fact that he is unwinding at a spread four times wider, at a massive DV01, means that there is no way the roll alone would have offset the blow out in spread. As a result it is fair to assume that hundreds of millions in P&L were lost as a result of this trade.

But while traders with huge balance sheets carry paper losses for weeks, months, and years (see JPM's whale) as there is no fear of margin calls, the fact that Buffett closed out of this position, well ahead of its maturity, on his own is grounds for major concern.

"There is a need for concern,'' said Bill Brandt, chairman of the Illinois Finance Authority and chief executive of Development Specialists Inc., which advises troubled cities and companies. "Many of these municipal leaders appear ready to sacrifice bondholders on the altar of the taxpayers rather than the other way around, which has historically been the case."


Bonds issued by cities generally haven't affected debt sold by states, but some states have seen credit-rating downgrades in the past five years due to budget problems or economic weakness.


In July 2007, Lehman bought default insurance from Berkshire on bonds from 14 states, including Texas, Florida, Illinois and California, according to a copy of an agreement between the two companies. Lehman paid $162 million to Berkshire, which agreed to pay Lehman if any of the states defaulted on their debt over 10 years. Berkshire essentially bet that total payouts, if any, would be less than the money it received upfront.


Some investors still see municipal bonds as attractive at the right price. Garey Fuqua, who heads distressed municipal-bond investments at Spring Mountain Capital, said he has been increasing the New York-based investment firm's cash position in anticipation of municipal-bond prices falling.


"We do believe there will be a selloff because of increased interest rates or because of widening of credit spreads," Mr. Fuqua said.

And while the termination itself is bad, it could be worse if Buffett had unwound his entire municipal stake. Luckily for what's left of the US muni market which continues to trade on a hope and a prayer even as local muni and state coffers run dry, Buffett will retain half of his exposure. Not because he wants to, but because he has to.

Berkshire still has swaps tied to roughly $8 billion in debt issued by hundreds of cities, states and municipalities. Those contracts can't be terminated before the underlying bonds mature between 2019 and 2054, according to the company. Berkshire also was paid upfront for providing this protection, which was purchased by other financial institutions.

Buffett is also quite aware that by selling half of his position, the resulting sell off as piggyback traders jump on the trade, will impair the balance of his positions. And still he has proceeded with the sale. All of which leads us to believe that not only did Buffett just join team Whitney, he has in fact doubled down.

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ACP's picture

Wow, so even Buffett doesn't think the muni issuers will be bailed out by his buddy, The Man in the High Castle?

HoofHearted's picture

Meredith Whitney, bitchez!

(stack up your food, ammo, gold, and silver...be the jerk that Charlie Munger knows we are)

krispkritter's picture

Buffy: The Muni Killer...and sequel in 3-2-1...

oddjob's picture

Buffett is a purveyor of 'yellow death' corn syrup to the masses, so yes he is a killer.

vast-dom's picture

buffet is a killer no doubt. and i feel, yields ZIRP and other fed fuckery notwithstanding, this could certainly by a component of the bond bubble pop. how long can the fed keep the bubble from popping when insiders like buffet dump this caustic junk?

strannick's picture

First they tell you Meredith Whitney and ZH are conspiracy theorists...

Then they tell you Warren Buffet dumps his Muni CDS...

Then CNBC tells you Oakland has fired its Po' lice Dpartmnt

Then your gold bets win.

TruthInSunshine's picture

You can judge a man by the company he keeps, and Warren Buffett is about as big a piece of fecal matter as men can be by that measure:


Munger Says `Thank God' U.S. Opted for Bailouts


Charles Munger, the billionaire vice chairman of Berkshire Hathaway Inc., defended the U.S. financial-company rescues of 2008 and told students that people in economic distress should “suck it in and cope.”


“You should thank God” for bank bailouts, Munger said in a discussion at the University of Michigan on Sept. 14, according to a video posted on the Internet. “Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies.”


New York & London, the twin city global HQ of the largest Ponzi Scam to ever have been devised and implemented (on a global scale), parasitically draining the life blood of any real economic activity for generations, should each name a square after The Honorable Charles Munger & his co-partner in racketeering, The Honorable Warren "Thanks for Making My 14 Billion USD Loss Whole, Bernank" Buffett.

LMAOLORI's picture



You can also judge him by what he himself does like lobbying for those bailouts, bailing his own billions out 

BUFFET's Betrayal (Buffett firms got $ billions of bailout cash)

and then there was Moody's he owned the majority of it (at that time) yet no one really talks about the ratings agencies  who aided the banks leading up to the crisis


Moody’s, S&P must face fraud claims in subprime suit

The links below I posted a few days ago on another thread so for those of you who missed it

N.Y. Fed says municipal bond defaults higher than ratings agency counts


"Defaults on municipal bonds for decades have been far higher than reported by rating agencies, bringing into question the true risk of a common investment widely considered to be safe, according to a studyreleased Wednesday by the Federal Reserve Bank of New York.

Economists at the agency counted 2,521 muni bond defaults since 1970, whereas ratings agency Moody’s Investors Service, for instance, reported 71.

in full http://www.washingtonpost.com/business/economy/ny-fed-says-municipal-bond-defaults-higher-than-ratings-agency-counts/2012/08/15/233bb780-e6f4-11e1-8741-940e3f6dbf48_story.html

Why Municipal Bond Defaults Are Higher Than You Think



AldousHuxley's picture

US Treasury used buffet's brand to backstop bank runs on majors. Of course they told Buffett any loss will be covered as they will move in with a federal bailout if they keep declining past Buffett's backstop point. And they did with GS and BAC....


Buffet owns the rating agency, owns insurance, owns the news wire of rumors, owns banks.....he pretty much owns the whole vertical.



selling CDS is like selling puts....it is a soft bet that underlying asset isn't going to go bust. warren isn't shorting the munis outright here...he is just not sure and maybe some will go bust and he would have to pay out. It is a strategy municipalities are taking...screw bond holders to save pensions in case Feds don't bail them out. Fed is have their own troubles, states took local revenues, so cities are hung to dry. It sucks when you are one company town.


Buffett may be covering himself from Romney win where fed isn't going to bail out states...


But states are actually doing ok. It is the local municipalities who got screwed by the state with delegated obligations without new tax authority. there is a big revenue sharing fight between states and locals.....

Bill Shockley's picture


The point of all this is that it will not be a crash down, rather a crash up. Sure it's the cities today, next it will be the counties and then the states and finially the Fed.

And it will be a grab for cash, not in the final analysis for property because those running the scams will run away and hide to save their necks. They will take what they can in the process but we do not need to give them ourselves today.


Every revolution, be it peaceful or violent, has winners and losers. Protecting assets as the process occurs  is secondary to following the good and finding safety for thse we love.

As is always the case it is personal, about personal honesty, about truth. It is about awareness.

Guns and gold.

Kyle is right.

Dalio is wrong, so is Buffet.

Many innocents will suffer because of their ignorance about what is real.

They are merly players.


JohnKozac's picture

Real question is, "Who bought this c-r-a-p ? "

Calpers I bet....he he he.

LMAOLORI's picture



California Bankruptcies Shield Retirees, Not Bondholders


Buffett’s Pullback

Some Stockton officials blame the economic decline for their current mess. Housing prices have fallen almost 70 percent from the height of the market, leaving a wake of foreclosures and plummeting tax revenue. Had officials shown restraint during the good years, however, they wouldn’t need to slash a quarter of the police force and other services during these bad years.

Stockton’s and CalPers’s “tough luck” approach toward Assured Guaranty could have troubling long-term consequences. Writing in the Prop Zero blog, Joe Mathews noted that Warren Buffett’s Berkshire Hathaway Inc. -- which had played down concerns about municipal bankruptcies -- dramatically cut its municipal investments after the Stockton and San Bernardino bankruptcy news.

in full


AldousHuxley's picture

bond holders had their asses saved by the fed on Fannie and Freddie. also with other bks, equities were wiped out but Treasuries saved the bond holders. California is coming back with a karma. screw bond holders, save pensions....good for pensioners, bad for new people in to the system where interest to borrow capital would be higher.

Lore's picture




"And I looked, and behold a pale horse: and his name that sat on him was Death, and Hell followed with him. And power was given unto them over the fourth part of the earth, to kill with sword, and with hunger, and with death, and with the beasts of the earth." - Revelation 6:8


oddjob's picture

Until all the monetary and budgetary tricks required to fund it are exhausted.

LetThemEatRand's picture

"Cargill is committed to operating responsibly across the agriculture, food, industrial and financial markets we serve as we pursue our goal of being the global leader in nourishing people."

-Orwell's ghost, or the Cargill website. Or both.

The Big Ching-aso's picture



Meridith Whitney.   Boobs & Brains.   Whatta formidable pair.

i-dog's picture

Buffet's on the inside track. Take it as a "sign" (like the London Olympics closing ceremony was a "sign").

Beware the Ides of October (or sooner).

fresno dan's picture

Isn't that a formidable triplet?

TruthInSunshine's picture

Just as Michael Burry, who is genuinely brilliant IMO, was massively correct but a tad early to the residential MBS implosion (in which he still netted nearly a cool billion USD for he and his partners*), Meredith Whitney will be vindicated in terms of the substance of her prediction and thesis.

What form the municipal bankruptcies will take, and regardless as to whether the bulk of them are even referred to by use of the "b" word, is anyone's guess, but they'll be bankruptcies all the same, pre-packaged or otherwise, with many, many investors taking the kind of geuine haircuts that Hank "tanks in the streets & martial law by Monday morning if I don't get a taxpayer funded blank check" Paulson immunized JP Morgan & Goldman Sachs from.


*Scion Capital LLC:  Although Burry suffered an investor revolt before his predictions came true, he earned a personal profit of $100 million and a profit for his remaining investors of more than $700 million.

The Big Ching-aso's picture



Charlie sez........ "Suck it up, Warren."

Daily Bail's picture

Truth In Sunshine

I published a story last night as a guest post from YOU -- it was something you wrote recently in a comment here at ZH.

It was some funny shit.  Well done.

Here's the link:

WARNING - Story includes pictures of fat-ass Corzine in St. Barts on the beach with some chick in a bikini.

Public Letter From The Office Of The Hon. Jon S. Corzine
TruthInSunshine's picture

I am honored. Thank you.


What truly is "the tell" as to whether there's any hope for our system (i.e. whether the sheeple will awaken and do something constructive or not) is the % of people who read that faux letter and don't realize it wasn't actually penned by The Hon. Jon S. Corzine.

I'm sure it's quite satisfying for those who know the real score to see Jon living the life of milk & honey as only royalty can, with his pimp hand strong, the untouchable that he is.

Daily Bail's picture

I was happy to publish it.  Your letter was a juicy bite of rabid sarcasm against these fuckers, which in the end is ALL we have.  Anytime you feel like writing something for publication just shoot it to me in an email. You can find my address on my site.

It's hard out there for most pimps, but not Corzine:


(From Hustle & Flow)
TruthInSunshine's picture
The Daily Bail


The Daily Bail
"We watch CNBC so you don't have to..."

+1 on the tagline. LMAO. Watching CNBC should be banned by the Geneva Convention. I've never experienced so much idiocy compressed into such a short timeline, splashy graphics, worn out cliches ("lotta money on the sidelines", etc.) and sell-side bullshit, in general, anywhere else, which is why I've literally not watched a second of it (save for a few choice Santelli out takes hosted here by ZH) in years.
Henry Hub's picture

***Corzine in St. Barts on the beach with some chick***

Sure beats sharing a jail cell with Bubba.

Manthong's picture

"Many of these municipal leaders appear ready to sacrifice bondholders on the altar of the taxpayers rather than the other way around, which has historically been the case."

I made this observation on an earlier thread:

I know first-hand how it applies to corporate and housing debt, but I just heard this term used for the first time in respect to municipal bonds.

“STRATEGIC DEFAULT”, as in ways to get out of union contract obligations and other local government overreaches.

Maybe it’s the municipalities that will swoop in on the Ponzi like a big black bird.

razsil's picture

You are absolutely correct and Buffett's action makes sense considering few municipalities declared bankruptcy in the past few months. The Whitney prediction will end up being true. She did what other great organizations do and as detailed in this blog - Trousers and Sunsets Don’t Lie - http://rsilberman.com/?p=402 - she mapped the environment very accurately. The only problem with bubble bursting predictions is that it usually takes a little longer than we expect for it to happen. But it's coming and if you can find a way to profit from it you can make millions.

Freddie's picture

Buffett is a Democrat piece of shit and friend of the islamic.   The scum unions and the lib judges are gonna screw muni bondholders.  If they buy MexiFornia muni bonds then they deserve to be screwed.  Buffett's Moodys will never downgrade the crap bonds.

The Big Ching-aso's picture



The muni-markets could be severely Buffetted by all this.

old naughty's picture

Buddies, still?

So close to election?

Something fishy...

max2205's picture

ie, 1 trillion hollow points.

Robot Traders Mom's picture

I'm hoping Max doesn't end up in an NSA holding cell after that kind of gov't hate speech.


Strength through Unity. Unity through Faith

i-dog's picture

Strength through Unity. Unity through Awareness.

Fixed it for ya'.

El Oregonian's picture

"The woMan in the High Castle?"

Peter Pan's picture

Dear Warren,

Next time see if you can give some money away to a worthy cause rather than losing it to Wall Street. By the way what happened to those pledges to give away half your wealth? Or is this part of that pledge?

Yours sincerely,

The little guy

ZackAttack's picture

The most relevant fact mitigating against a muni bond bailout - they are 70% held by retail investors.

JR's picture

Recovery!  Recovery!  …Retreat?

Aquaman's picture

She didnt put a time stamp on the call. She said people will start to WORRY about muni defaults in 12 months. And then every jerkoff "journalist" who didnt even do the diligence to watch the video (ahem) took what she said out of context. Shes got huge tits. And anyway what was I even talking about.

Aquaman's picture

Dont shit on my fantasy especially when I am right in the middle....

otto skorzeny's picture

she has some serious DSLs. my dreams are now haunted by the chick in the ad here on ZH for Road Kill t-shirts-petite brunette w/massive knockers-way hotter the the meh/camel toe chick

stocktivity's picture

Just don't sign your real name....her husband is a professional wrestler.

Aquaman's picture

I am a professional unicorn rancher, so we should be evenly matched.

Tyler Durden's picture

December 19, 2010, 60 Minutes on municipal defaults. 12:30 into the clip.

"50 to a 100 sizable [muni] defaults. More. This will amount to hundreds of billions of dollars of defaults... It will be something to worry about WITHIN the next 12 months."

One [one being a logical person who follows causal chains and object-subject links] assumes the "it" refers to the "50 to a 100 sizable muni defaults amounting to hundreds of billions of dollars." Then again, one should ask Bill Clinton to define "it."

disabledvet's picture

touch and go with the Chinese and the Treasury at the time. This was the beginning of "the great bond rally" which caused yields to plunge irrespective...or because of interestingly...the "mega events" of the Arab Revolt, Fukushima and the "Great Catastrophe of Trichet." At the same time oil production was ramping up in North Dakota to a level not even believable a few years prior...and the plunge in natural gas prices was well underway. ALL of these events proceed apace today BTW. It would appear the USA has in fact skirted a Great Depression 4.0 in the traditional sense but the battle between the inflation creators and the hard money folks going forward in the weeks, months and year ahead will be EPIC. with a backdrop of a total commitment of a MASSIVE US Army to the entirety of the Middle East and some type of "return of the histrionics of 2008" seems well underway. Clearly a significant election...although Wall Street still looks like this to me:http://www.youtube.com/watch?v=mVN-5-I5iBo Clearly getting beyond "bailout enonmics" is imperative. I'm not sure the ultimate ramifications were really thought through by any of the parties concerned. With a "stealth nationalization" of Fannie and Fred I simply would not be anywhere other than equities, oil and tech for the forseeable future.

I am a Man I am Forty's picture

Thank you tyler for correcting the idiot above that was up arrowed by 26 sheeple and counting.