Collateral calls

[Robbob9933]

Now if AIG was allowed to go bankrupt, all those insurance contracts could have been eleminated and the collateral returned to AIG. This would have put all the risk back onto the purchasers of the securities as it should have always been.

[kennethyapyl]

if you're watching this and you're a NP student revising for SOP exam, like this. (:

[louislockett]

I'M SORRY, i CAN'T HELP IT, BUT YOUR UNCLE SAM LOOKS LIKE DR TEETH FROM ELECTRIC MAYHEM!!! OTHERWISE WONDERFUL VIDEO.

[matharujs]

Great video, I have a couple of questions though, perhaps someone could help me:

(i) Who holds the collateral money? Is it put in escrow?

(ii) If AIG were to go bust, could the bank keep the collateral regardless of whether the bond defaults or matures?

Thanks

[emailbryan]

1. The money is held in escrow

2. The bank can only keep the collateral if the bond defaults. If the bonds matures the collateral is returned to AIG.

[fatalegg]

U da Man Paddy! make it rain!!

[paddyhirsch]

Hi Atheistprimate

500k sounds like a bit much, doesn't it? If the contract ran for five years and Sam was paying 500k a year, well, clearly his insurance would cost him as much as the bond! In the CDS world, those fees are driven by the quality of the underlying asset being insured - much like in the "real world". So, for a AAA rated company in good times, the fee will be pretty small. But for General Motors in a recession? I'd be looking for a pretty fat fee there.

[erikig]

Beautifully explained.

A very important point that Paddy made that I don't hear very often is that the AIG collateral call payouts are bound to be paid back assuming some of these bonds mature or can be renegotiated.

I say Paddy for Treasury Communications Liason. Somebody needs to help Timmy G, Benny B and The Politicians understand some of these intricacies.

[redmangos]

thanks for making complex subjects easy to understand for regular joe like me.

[lionheartSONIC21]

Paddy Hirsch you're the greatest.

I love all your whiteboard explanations. Thank you!

[elpresidio]

Thanks for making this easy to understand Paddy. I would never be able to understand this stuff watching CNBC but you simplify the concepts for everyday guys and gals like us on the whiteboard. Thanks and keep up the great videos.

[Christophercyr]

excellent

[BlueTunisia]

I love your videos and marketplace! Keep on goin guys!

[Atheistprimate]

How does Sam make any profit off the bonds if he is spending so much a year for insurance?

[nutsbutdum]

The value of the $5M GM bonds can always increase, but the insurance fee has got to be less than $500K/year too in order to make any money.

[matthewsam1]

Sam also collects annual coupons payments on the bond. So say a 7% coupon on $5M will amount to $850k/annually.

[eswyatt]

@Atheistprimate That's what I'm wondering. If the premium is based on the "swap spread," and the swap spread is what it takes to make the bond equivalent to a "safe bond," then why not just buy the safe bond? Judging by the fact that there are no uploader comments, I assume this guy isn't interested in clarifying anything in his videos.

[rl0u8888]

Thank you. Very informative. Please keep up the videos :)