Feb. 12 (Bloomberg) -- Billionaire investor Warren Buffett said he offered to shore up $800 billion of municipal bonds guaranteed by troubled MBIA Inc., Ambac Financial Group Inc. and FGIC Corp. in a bid to gain 33 percent of the debt insurance market.

Buffett's Omaha, Nebraska-based Berkshire Hathaway Inc. would assume the risk of the debt from MBIA and Ambac in exchange for charging a fee of $4.5 billion each, according to a letter to MBIA's advisers that was obtained by Bloomberg News and confirmed by Berkshire Hathaway spokeswoman Jackie Wilson.

The offer drove U.S. stocks higher on optimism the plan would help calm credit markets and prevent a slump in the value of municipal debt. MBIA and Ambac dropped on concern Buffett's proposal would leave them with mortgage securities that caused more than $5 billion of losses last quarter, while Berkshire would gain a municipal guaranty business that has generated profit for more than 14 years.

``He is offering to take the fattest, most profitable part of their business,'' said Jerry Bruni, president and portfolio manager, at J.V. Bruni and Co. in Colorado Springs, Colorado. Bruni has $650 million under management including Berkshire shares. The firm sold MBIA last month. ``I can't imagine why they would want to do that. If I were MBIA or Ambac, this does not sound like a good offer.''

The offer excludes the bond insurers' subprime-related obligations, Buffett told CNBC during an interview today. He said one company had already rebuffed the proposal.

Ambac rejected the offer, the Associated Press said, citing a statement from the company. An Ambac spokesman told the AP that Ambac wasn't the company to which Buffett referred, and that it didn't respond to Buffett before issuing its statement.

$5 Billion

Berkshire would put up $5 billion as capital for the plan and is offering to insure the municipal debt for 1.5 times the premium charged by the bond insurers to take on the guarantee. The insurers could accept the offer and back out within 30 days for a fee, Buffett said.

Berkshire's Wilson declined to elaborate on the offer, which Buffett announced during an interview with CNBC.

Spokespeople for MBIA, Ambac and FGIC didn't return calls seeking comment.

Armonk, New York-based MBIA, the largest bond insurer, Ambac and FGIC are on the verge of losing their AAA credit ratings, potentially crippling their sales to municipalities after losing $5 billion from insuring mortgage-related securities.

`Ceding the Book'

The bond insurers lend their AAA stamp to $2.4 trillion of debt, and face potential losses of as much as $41 billion if the value of debt they insure continues to decline, according to JPMorgan Chase & Co. analysts.

MBIA, which started as the Municipal Bond Insurance Association in 1974, Ambac and FGIC are reeling from their expansion beyond guaranteeing municipal debt to collateralized debt obligations, which repackage assets such as mortgage bonds and buyout loans into new securities with varying risk. As the value of some CDOs plummets, ratings companies are pressing the insurers to add more capital.

``If you gave up your entire municipal business, that's the book of business where the value in the companies is right now,'' said Robert Haines an analyst in New York for CreditSights Inc., an independent bond research firm. ``You'd essentially be ceding that whole book to Buffett and what you'd be left with would be the book of business where all the troubles are.''

Under Review

MBIA's AAA insurance rating is being reviewed by Moody's Investors Service, Standard & Poor's and Fitch Ratings. Ambac's insurance unit had its AAA rating cut to AA by Fitch and is being scrutinized by Moody's and S&P. FGIC's guaranty business had its top rating cut to AA by Fitch and S&P and is being reviewed by Moody's.

MBIA fell $2.08, or 15 percent, to $11.50 in New York Stock Exchange composite trading. New York-based Ambac, the second- largest bond insurer, dropped $1.58, or 15 percent, to $8.90. Berkshire fell $250 to $139,700.

Fourth-ranked FGIC, based in Stamford, Connecticut, is a closely held company owned in part by New York private-equity firm Blackstone Group LP and mortgage insurer PMI Group Inc. PMI, based in Walnut Creek, California, rose 12 cents, or 1.5 percent, to $8.39, and Blackstone declined 19 cents to $17.59.

U.S. Stocks Rise

The Standard & Poor's 500 Index added 18.6 points, or 1.4 percent, to 1,357.73 on optimism Buffett's plan would protect municipal bonds, even if it comes at the expense of the insurers. Treasuries fell after the plan reduced demand for the safety of government debt.

``This news is encouraging,'' said Michael Ross, a municipal bond analyst at Morgan Keegan & Co. in Memphis, Tennessee. ``For weeks the focus has been on rating reviews and watching bonds tumble and stocks stumble. It tells us that behind the scenes discussions are occurring.''

Credit-default swaps on MBIA were trading at 17.5 percent upfront and 5 percent a year, up from 16 percent initially and 5 percent a year yesterday, according to London-based CMA Datavision. That means it costs $1.75 million upfront and $500,000 a year to protect $10 million in MBIA bonds for five years.

Ambac's upfront price rose to 17.5 percent from 15.5 percent yesterday, CMA data show. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates worsening perceptions of credit quality; a decline, the opposite.

Bank Rescue

The threat of downgrades was great enough for New York Insurance Superintendent Eric Dinallo to attempt to organize a bank-led rescue of bond insurers.

Buffett's proposal ``provides one option to protect municipal issuers and investors,'' Dinallo said in a statement today in response to Buffett's plan.

``It would be a great deal for Berkshire Hathaway and a great deal for the municipal bondholders,'' though not the bond insurers, said David Havens, a credit analyst at UBS AG in Stamford, Connecticut. ``The regulators and the politicians would love to see this happen.''

Property Coverage

Eight banks including New York-based Citigroup Inc. and UBS in Zurich are working on financing for Ambac, a person briefed on the plan said two weeks ago. Credit Agricole SA's Paris-based Calyon unit is leading talks to bail out FGIC, the Wall Street Journal reported last week, citing people familiar with the situation.

Buffett, 77, has built Berkshire into a company with a market capitalization of $216 billion by making contrarian bets, purchasing stocks he regards as undervalued and selling insurance on risks that others won't cover.

After Hurricane Katrina, the costliest natural disaster in U.S. history, he sold property coverage along the Gulf Coast at rates that were several times higher than a year earlier. As other insurers returned a year later and drove down rates, he scaled back.

Buffett's bond insurer plan ``seems very fair,'' William Ackman, a managing partner of Pershing Square Capital Management LP said at a forum on credit markets sponsored by the Hudson Institute in Washington. Pershing Square has short positions in MBIA and Ambac, allowing it to profit from declines in the stocks and bonds of the companies.

`Very Appealing'

``This is a very appealing solution,'' Ackman said. ``It is a potentially very significant attempt to remove some of the systemic risk.''

If the municipal debt was reinsured by AAA rated Berkshire, the borrowers would also retain the top rating, Buffett said. Without AAA ratings, thousands of schools, hospitals and local governments may be forced to pay higher interest and some fund managers would be obliged to sell any holdings that lose their top rating.

``You would see a greater supply hit the market so you could easily have a disruption for a while,'' Buffett told CNBC.

This plan ``would solve it in one stroke of a pen,'' Buffett said.

To contact the reporter on this story: Christine Richard in New York at crichard5@bloomberg.net

Last Updated: February 12, 2008 19:49 EST