Buffett Says U.S. in a Recession; Pulls Back on Muni Bond Offer

March 3, 2008

Warren Buffett on Monday said the U.S. economy is in recession and that “stocks are not cheap.”

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

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

He said, though, that the environment is “nothing like ’73 or ’74 yet,” referring to a deep economic downturn also marked by rising oil prices and falling stocks. Buffett said investors should not rule out the possibility of a significant economic downturn.

On Friday, Buffett’s insurance and investment company Berkshire Hathaway Inc reported an 18 percent 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.

Buffett said he is finding more buying opportunities in stocks, following a 16 percent 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,” Buffett said. But he acknowledged that conditions have changed “more dramatically” in the bond market. Berkshire last year spent $19.11 billion on stocks and $13.39 billion on bonds.

Falling securities and liquidity have pummeled bond insurers, which normally insure relatively safe municipal bonds. But those insurers are under pressure after they also guaranteed billions of dollars of riskier debt, often tied to subprime mortgages.

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

Buffett on Monday said his earlier offer is “not on the table.” In December, Buffett started its own bond insurer, Berkshire Hathaway Assurance Corp.

(Reporting by Jonathan Stempel; Additional reporting by Kevin Plumberg and Dan Wilchins; Editing by Derek Caney and Steve Orlofsky)

Topics USA

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