More Wall Street Impacts, AIG in Construction Bonds

So Sara Palin of was on a the Republican friendly Hannity and Colmes talk show and commented about AIG's potential failure and how it could send shockwaves through the public works construciton world. Of course, there was a lot of partisan criticism, but there may be something what she was saying.

According to the Wall Street Journal:

AIG was, however, the 14th largest issuer of surety bonds on construction, said William Schwartzkopf, president of Sage Consulting Group and author of several books on construction claims. By writing a surety bond, an issuer, such as AIG, is guaranteeing that the contractor will finish a construction job. Last year, there were $5.3 billion in premiums for surety bonds written, including $79 million for surety bonds written by AIG.

Even if AIG had gone under, states, which regulate the financial guarantees under their insurance codes, would have covered any AIG claims with a government fund. But there was no guarantee that contractors and those who commissioned them would be completely covered.

More importantly, since very few companies–Schwartzkopf guesses fewer than 10, including AIG–have the capacity to write “the truly big bonds” for expensive construction projects, there would have been “dislocation in the short-term,” as contractors who routinely turn to AIG for their bonds cast around for other issuers.

One of the biggest problems for contractors large and small is bonding. Yet another hoop, but if AIG would have failed would the hoop have become more expensive?