Will Buffett insure intangibles?

Warren Buffett is moving into the bond-insurance business. According to a story in the Wall Street Journal:

Warren Buffett, seizing a chance to profit from turmoil in the nation’s credit markets, is starting up a bond insurer that aims to make it cheaper for local governments to borrow and promises to be a tough competitor for the industry’s embattled incumbents.
The billionaire investor’s Berkshire Hathaway Assurance Corp., set to open for business today in New York state, will guarantee the bonds that cities, counties and states use to finance sewer systems, schools, hospitals and other public projects.

Give that he is already known for looking for assets that generate strong cash flow, will he look to the securitization of trademarks and other intangibles (backed by franchise fees)? Probably not right away, according to the Washington Post:

He said the company would stay away from insuring complicated structured products such as bonds backed by mortgages and credit card receipts.

The key here is “complicated structured products.” To some extent, intangible-asset backed securitization is transparent and uncomplicated. Of course, there are still all the questions about the value of the underlying asset. The problem with mortgage backed securities is not just the complicated structure but the uncertainly over the ability of borrowers to repay the loans. Figuring out that risk is the job of the bond insurer – which is what Buffett is going to have to do. So without all the traunches and CDO, straightforward bonds backed by franchise fees or patent royalties might be an attractive business – even for Warren Buffett.

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