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Buffett retracts US$800b bond guarantee offer

Separately, he says US economy is in recession, stocks are not cheap

(NEW YORK) Billionaire investor Warren Buffett said yesterday that the US economy is in recession and that stocks are not cheap, despite recent declines.

Speaking on CNBC television, Mr Buffett also said that he is no longer offering to guarantee US$800 billion of municipal bonds backed by MBIA Inc, Ambac Financial Group Inc and FGIC Corp, three large bond insurers.

He said that ‘from a common-sense standpoint right now, we’re in a recession’, though the US economy has not yet recorded two straight quarters of declining gross domestic product, a traditional indicator of recession.

He said that the environment is ‘nothing like ’73 or ’74 yet’, referring to a deep economic downturn also marked by rising oil prices, higher inflation and falling stocks. Still, he said that investors should not rule out a significant economic downturn, and that Federal Reserve chairman Ben Bernanke has a ‘very tough balancing act’ in trying to boost economic growth without kindling inflation.

Mr Buffett said that there is a fair chance that inflation may ignite in a ‘serious way’.

On Friday, his insurance and investment company Berkshire Hathaway Inc reported an 18 per cent decline in fourth-quarter profit. This stemmed in part from weakness in businesses linked to housing, including units that make bricks and carpet, and that offer real estate brokerage services.

Mr Buffett said that he was finding more buying opportunities in stocks following a 16 per cent decline in the Standard & Poor’s 500 stock index from its recent high in October. ‘I find more things to look at now than I did six months or a year ago.’

But he acknowledged that conditions have changed ‘more dramatically’ in the bond market. Berkshire last year spent US$19.11 billion on stocks and US$13.39 billion on bonds.

Falling security values and liquidity have pummelled bond insurers, which normally insure relatively safe municipal bonds but also guaranteed billions of dollars of riskier debt, often tied to sub-prime mortgages.

On Feb 12, Mr Buffett offered to reinsure US$800 billion of municipal bonds, but only at a steep premium. The offer did not include the riskier debt. Bond insurers rejected the offer and have been seeking new sources of capital or possibly breaking themselves up.

Mr Buffett yesterday said that his earlier offer was ‘not on the table’. In December, he started his own bond insurer, Berkshire Hathaway Assurance Corp.

Since 1965, Mr Buffett has transformed Berkshire Hathaway Inc into a US$216 billion conglomerate by acquiring out-of-favour companies with strong earnings and management, and investing in stocks.

Berkshire’s Class A shares closed on Friday at US$140,000. Through Friday, they had risen 32 per cent in the last year.

Source: Reuters (Business Times 4 Mar 08)

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