Legendary investor, Warren Buffett — the Sage of Omaha — in a move he says is designed to make money, has offered to take on $800 billion of the liabilities of U.S. municipal bonds.

The offer goes to three “monoline” bond insurers, Ambac Financial, MBIA and Financial Guaranty Insurance. One has already rejected the deal, and he is still awaiting reponses from the other two, although one of them is making favourable noises.

The move breathed new life into global stock markets yesterday. The monolines are seen as the second line of defence against the sub-prime mortgage fiasco by propping up banks’ balance sheets in the event of a repayment meltdown.

Traditionally, the bond insurers concentrate on municipal risk, but they too got caught up in the collective madness of sub-prime lending for the same reason respectable banks did : greed for perceived easy money.

However, the monolines are now short of capital and are being hit by downgrades from the rating agencies.

T J Marta, fixed income strategist at RBC Capital Markets, said it was a coup for bond insurers, which could help them avoid “the doomsday scenario”.

Last week the S&P500 hit an all-time high, throwing off years of sluggish performance.

To underline that, just compare the S&P with Britain’s FTSE100. Over most of the past seven years, the Footsie has steamed ahead of its U.S. equivalent. In the last five years the UK index has leapt 50 percent compared with 12 percent in American markets. Over the past three years, the S&P500 has returned 30 percent set against 64 in the UK.

Since 2000, the U.S. index has fallen overall by 8 percent compared with a gain of 32 percent by the Footsie.

Peter Seilern of Seilern Investment Management responds, “People talk about the trade deficit which is no worse than many eurozone countries. And if you look at valuations, the S&P500 is trading at about 18 times earnings, which is neither cheap nor expensive. America has a culture of enterprise and some of the best managed companies in the world.”

Cormac Weldon, head of U.S. equities at Threadneedle, says, “There are now sound reasons for investors to reassess their allocation to the U.S. market.”

When the market opened this morning to news of terrorist attack plots, stocks slipped in the jittery atmosphere of uncertainty. But they rallied and fought back as oil prices began to tumble.

Analysts did not agree on the reason for the $2.35 per barrel decline. Some opined that it was as a result of the terrorist plot and the possibility of reduced airline flights while others felt that other factors such as the slowing economy played the major roles in the plummeting oil prices.

As expected, the Federal Reserve opted not to raise interest rates hoping to keep inflation down in the flagging economy. The FOMC has announced it will keep its Federal Funds rate target at 5.25 percent.

The statement released today indicated that this was a pause rather than a halt in rate hikes and expressed the opinion that inflation pressures may moderate over time thus implying that rate hikes in the future cannot be ruled out.

The pause by the Fed was not unexpected by investors, although the possibility of future rate increases was disappointing and stocks slipped after the announcement.