Buffett Dumps Municipal Bonds, Spooks Investors

Warren Buffett isn't betting on the health of cities, states, and towns anymore. Berkshire Hathaway has backed out of a number of credit-default swaps insuring $8.25 billion in municipal bonds, sending shivers of doubt through investors who've been hungrily buying such bonds, the Wall Street Journal reports. The insurance-like derivatives, which Lehman Brothers purchased in 2007, would require Berkshire to pay a large sum if the governments in question defaulted.

Now, Buffett's backing out of the deal five years early—probably, one professor speculates, because he thinks they're riskier now than they were then. Demand on Wall Street for municipal bonds is sky high—investors poured $964 million into municipal bond mutual funds last week—but there have been red flags, like recent bankruptcy filings from three California cities. "Many of these municipal leaders appear ready to sacrifice bondholders on the altar of the taxpayers," says one executive, "rather than the other way around." (More Warren Buffett stories.)