In the last week of 2007, The Wall Street Journal reported that Berkshire Hathaway Assurance Corp. had announced that it will start a new insurance company, one that would guarantee municipal bonds.

I have been asked by many people for my read on why Warren Buffett would make such an extraordinary investment in the face of looming recession and a debacle in the municipal bond insurance market. So I now offer our readers my personal opinion.

It is often difficult to guess what is going on in the mind of the "Oracle of Omaha," particularly when he is way ahead of the curve, but here goes.

A quote widely attributed to banker Nathan Mayer Rothschild, 1st Baron Rothschild, reads: "Buy when there is blood in the streets."

Well, I agree. Indeed, in the face of looming recession, this is exactly why I have been urging our readers to accumulate heavy holdings of cash and gold, in order to be ready to invest when things are really "cheap" (i.e. likely to rise from the distress prices I see ahead).

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Incidentally, Buffett has accumulated a high level of cash — some $47 billion! Wisely loaded with cash, Buffett was ready to invest.

Meanwhile, some of the muni bond insurers, among them Ambac and MBIA, have underwritten the financial guarantee of certain municipal bonds that now appear to be threatened by the fact that subprime borrowers could be foreclosed upon.

The result is expected to be a seriously reduced flow of property taxes to the municipalities that issues the bonds.

Belatedly, the rating agencies have now woken up to this problem and have, at long last, lowered their rating on some insurance companies to a level that, short of massive capital injections, will preclude them from underwriting insurance — their corporate life-blood.

So, in the area of municipal bond insurance, the blood is already seeping into the street. It may become a torrent before much longer.

As a result, municipalities will be losing many of their sources of revenue. They will become desperate to issue more debt instruments. But who will buy them, in the face of a deepening credit crunch?

So, with blood already flowing freely in the municipal bond insurance street, enter Mr. Warren Buffett and his cash-rich Berkshire Hathaway Assurance Corp.!

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However, Buffett does not buy, even at dirt cheap rates, a "mature" muni-bond insurance house wallowing in major potential insurance claims. No, they could get cheaper still.

Buffett instead prudently starts a brand new, "clean" insurance company. Furthermore, he is early, snapping up skilled staff (those laid off by the older, mature companies) before any competition arrives.

Soon, he will be offering muni-bond insurance but to carefully vetted municipalities and at a price that will reflect a new, realistic view of risk.

But will financially strapped municipalities pay realistic and seemingly exorbitant insurance rates? You bet they will!

Firstly, as I said, they will be desperate.

Secondly, they have available the bottomless pocket of the taxman.

Thirdly, with the "mature" companies unable to underwrite new guarantees, there will be virtually no competitors, at least until other late-comers assemble the deep financial pockets required to enter this field.

I believe that Buffett will be able both to pick his risks and to charge rates that, for a time at least, will effectively monopolize prices! That means big profits from an apparent disaster area.

In addition, thanks to his deep experience insurance, including Geico, General Re and several others, he clearly understands the business.

I offer this opinion, because, to me at least, it appears that Buffett is only just beginning to profit from his pile of the hoarded cash that I have been urging upon our readers for many months.

(For instance, Buffett also quickly spent $4.5 billion of Berkshire's cash for 60 percent of Marmon, the industrial conglomerate controlled by the Pritzker family.)

Furthermore, I believe Buffett is truthful when he says he does not "time markets."

The market price of Berkshire Hathaway did indeed suffer a hit on the news that Buffett had entered a disaster area. But if you enter a disaster area with aid, you are seen as a rescuing hero, and in the economic world at least, you can charge for your "rescue" services.

Buffett thinks long-term and is interested in wisely earned profits, not speculation. Markets eventually pay up for "quality" corporate profits. He can afford to wait as markets collapse, knowing that he has created a quality cash-cow.

Have you missed the boat?

Not at all! So far, in my view, we have felt only the outer, introductory winds. The coming economic and financial hurricane will leave much blood in the streets and massive investment opportunities for the prudent.

If you cannot stay in cash and fancy a little risk, consider the exchange traded funds my colleague David Frazier has recommend. Since inception just four months ago, in September 2007, his performance has been exemplary.

For instance, there are plenty of ETFs that short the stock markets and certain specific sectors, such as retail, while they go long on soft foodstuff commodities and gold.

In doing this, you can, if you seek some risk, benefit from your pessimism to enhance the potential size of your pile of cash, as both our dollar and our stock markets slide on the growing public realization of lower interest rates and shrinking corporate earnings.

P.S. You can learn more about David's newsletter, The ETF Strategist, by clicking here.

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