Y'all might have seen on/in the news that Warren Buffett has offered to re-insure $800 billion of muni debt in the portfolios of Ambac, MGIC and MBIA. The terms of the deal sound pretty sweet for Buffett, but there is certainly something in it for the monolines... with a catch.

The monolines have been soft-peddling just how badly they're exposed on the "structured finance" side of their businesses. If the potential losses are going to be as contained as they've been claiming up until now, Buffett's deal would work out well for them. Buffett's money would inject much needed capital into the monolines, they'd be able to come through the structured finance problems and proceed to mint money in the future by insuring structured products -- presumably for much more than they have been until now.

But at least one of the three has rejected Buffett's deal to date, and the other two appear unlikely (from external indications) to take the deal. 

This can mean only one thing from where I'm sitting: Buffett has called the bluff of the monolines. If they're not outright lying about how badly they're going to be hit by the CDO write-downs, they're utterly ignorant about how much their liabilities are just now.

Translation: the bond market ain't out of the woods yet. The time, place and exact manner of the next blow-up isn't known at this time, but we can point to a whole big patch of the bond market and say "Somewhere over yonder, there's lots of land mines and unexploded ordnance.... and we're just waiting for a suitably stupid yahoo with big feet to take a stroll through there..."