Collateral calls

Millions of Americans are wondering why AIG has paid so much taxpayer money to other banks. One reason is because AIG has had to honor "collateral calls" -- demands made by banks on the insurance contracts it's written. Senior Editor Paddy Hirsch explains,

About the author

Paddy Hirsch is a Senior Editor at Marketplace and the creator and host of the Marketplace Whiteboard. Follow Paddy on Twitter @paddyhirsch and on facebook at www.facebook.com/paddyhirsch101
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Where does all this leave the little guy?

How does Government spending stimulate the economy, and what's the risk to the tax-payer? Thank you.

Just wanted to say thanks again for these whiteboards, Paddy. Good explanation to help understand more about these financial instruments. Keep it up!

To use your example of Sam and AIG, It seems to me that an increase in risk of the insured asset (say the bonds in your example) would result in not just higher collaterals for AIG, but an increased cost to SAM to insure the assets (bonds) since they are now a riskier investment from AIG's point of view. Is this true in fact?

Great segment! But why does anyone trust the ratings agencies anymore?

Hi Shel Sam would pay as much as the insurer demanded. He'd pay very little for a AAA company in a boom. But for General Motors in a recession? Well, maybe not as much as 20% per year, but you can bet the insurer would want a fairly fat fee for that coverage. paddy

Interesting explanation. But why would Sam pay so much for these bonds? The initial $5 million, plus $500,000 a year. Does this really pencil out?

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