Daniel: That’s correct, but with a caveat. It presupposes that in case of a correction, the various positions will not unwind in a disorderly fashion. This would be akin to what happened with LTCM in ’98. These various hedged positions are built using computer models that have not been tested in a full-blown crisis.
Moreover, many of the supposed “controls” (like insurance) are at grave risk due to both a lack of understanding and a lack of transparency.
Bernanke himself had to undergo a refresher course recently in this area. This is a very arcane area of finance, and many of the hedge fund players have been very lucky up to this point. The markets are under increasingly severe strain and, due to a lack of real-world testing for these computer models, there is a great deal of concern over what might happen.
I don’t think it is any surprise that Buffett has jumped into the monoline insurance/reinsurance market. There is a great amount of fear out there, which means there is a great deal of money to be made.
