COLUMN: Pay him now, so we can pay him later

Jul 10, 2008

St. Petersburg Times--July 9, 2008

By Howard Troxler, Times Columnist

You and I — let’s call us “schmoes” — will now be paying $224-million to Warren Buffett — let’s call him “one of the richest guys in the world.”

The state of Florida decided the other day to ask Buffett to take our money, which he no doubt will.

Now, what are we buying? A nice chunk of his company, Berkshire Hathaway? No.

We are buying the right to borrow money from him later, in case a really big hurricane (or series of hurricanes) hits Florida this year.

If we get Andrew-sized damage, then Buffett agrees to lend us up to $4-billion by buying our bonds.

(The state says there is about a 3 percent chance of that happening.)

If we don’t get that hit — well, we’re out the $224-million. But we’ll have had the security of knowing his money was there for us.

This is why Warren Buffett is one of the richest guys in the world, and we are schmoes.

In the lingo of the market, what Florida is buying is called a “put option.” We are buying the right to borrow money later. This is one big honker of a put. We are paying top dollar for it, too.

The decision was made last week by Gov. Charlie Crist, by Florida’s chief financial officer, Alex Sink, and by Attorney General Bill McCollum.

The governor is always cheerful, but Sink and McCollum were not.

“This is not a good deal overall,” McCollum said. But he called it “the only responsible choice at the moment.”

“We waited until the last minute,” Sink said, noting Florida is already more than a month into the hurricane season. “We’re not thinking ahead. This is not the way to run policy.”

Here is the immediate problem: Florida has a hurricane catastrophe fund, called the “Cat Fund,” that kicks in if a storm is bad enough.

But we would have to borrow most of that money, and pay it off by future assessments on insurance policies.

In theory, this works.

In practice, we are at the mercy of the markets. We might not be able to borrow that much on the spot. So we looked around for safe options and came up with Buffett.

I asked Dr. Jack E. Nicholson, director of the Cat Fund, if this was the ideal way to do things.

He said no, but it is the right thing to do now. There has been a lot of upheaval in the state’s investment setup —there was a big scandal; you might have heard of it. Florida has been racing in recent months to redo things.

With more time, the state could line up its options earlier. Maybe we wouldn’t be paying top dollar to Warren Buffett for a put option at the last minute. Maybe.

Here’s another thing: Earlier this year, Sink proposed changing the rules for the Cat Fund to reduce Florida’s exposure by $3-billion or so. But the Legislature didn’t like it because it might have led to a small increase in premiums.

Oh, and here’s one more thing: The governor, a “let’s pay later” fellow, decided we will pay Buffett out of what cash we have in the Cat Fund now, instead of dunning everybody’s insurance policy.

Nicholson sounded like a guy I could kid, so I told him: “If we get that storm, you’ll be the smartest guy in the world. If we don’t, you’ll be the idiot who gave $224-million to Warren Buffett for nothing.”

He said that for Florida’s sake, he hopes he is the second guy instead of the first. I hope so, too.