Posted On: October 31, 2008, 7:05 pm CDT

Posted By: stckbyr

In addition, you should mention that when the ratings assigned to the party on the hook for the CDS are downgraded, that party has to post more collateral because the buyer of the CDS is more exposed to non-performance due to default.

In AIG's case this has become a downward spiral. When AIG's creit rating was cut on 9/16 (or was it 9/15) they were required to post about 14 billion of additional collateral (i.e. cash) they could not immediately obtain. That was posted by drawing from the government under the "loan" program AIG "voluntarily entered".

The extra borrowing and the ham-handed way it was presented (first a vote, then no vote; first ownership, then a preferred position with warrants) resulted in more concern about AIG and more credit downgrades--thus the need to borrow more from the government.

Then the general histeria over the credit crunch, more rapid moves by the government against WM and WB and worries that loan portfolios are worse than thought at mid-September, so more default concerns and you guessed, more collateral needed and thus more borrowed from the government.

The government and AIG are in a different relationship today than 45 days ago. The n AIG owned the government 14 billion and AIG had a problem. Today, AIG owns the government more than 90 billion and now the government has a probelm.