And you end up with a mortgage backed security.

So these shares each of these one million shares this is a mortgage backed security.

I think it's a distraction.

I have a whole video on mortgage backed securities.

That's how loans worked before the mortgage backed security industry really got developed.

But we have to start with the basics.

Some of them are going to pay ahead of time.

But you should watch the videos on mortgage backed securities and collateralized debt obligations, if you want to get a better understanding of exactly how the money flows go.

But anyway, this isn't the crux of it either.

I make are to the bank.

And that's why they are called derivative instruments.

And the cash flow will come back to it.

You group them all together.

Mortgage backed security.

You'd have to sell that loan to someone else.

So there's no way for him to invest in this security and to get better returns.

So let's make some very simple assumptions for ourselves.

And this guy's an investment bank instead of a commercial bank.

And the loans are just the right on these 10 payments.

Those are essentially derivative securities that are derived from mortgage backed securities.

But on average this Special Purpose Entity will then be able to pay a dividend.

We would create incentives for securitization.

I have 4 billion in residential CDOs, collateralized debt obligations.

And so money came from when the owners of each of these mortgage backed securities each, let's say, paid 1,000 for the mortgage backed securities.

I only have two minutes left in this presentation, so in the next presentation I'm going to focus on what this guy can now do with the loan to turn it into a mortgage backed security.

My next presentation, I'm going to take it to a further

So that's what we're going to show you in the presentation on collateralized debt obligations.

And that's why we say that it's a mortgage backed security.

And this is what you probably read some articles about, these hedge funds with these computer models to value their mortgage backed securities.

And because it's a junkier rating, no one is going to want to buy it.

So takes a Goldman Sachs, which is considered the top dog in the economy and the political system.

But based on the model that we just constructed, I think the real return we're going to get on this mortgage backed security is 9 .

So this is a form of a collateralized debt obligation.

Or they might even start to buy things that aren't Treasuries.

So that's why the book value of the equity is now 2 billion.

And then we said, OK, well where does that money for this special purpose entity, or for this corporation, come from?

For the right interest rate and for the right assumptions in my model, I'm willing to give anybody a loan, as long as I'm compensated for it enough.

But essentially what happened is the investors in the mortgage backed securities provided the money to the special purpose entity to essentially loan to the borrowers.

And these shares would be called Mortgage Backed Securities. or sometimes MBSes.

They'd start with your bonds preferred stock, and then move on to real estate.

Word is that davis' fund has taken some big hits on mortgagebacked securities.

It could split the Special Purpose Entity into a million or ten million shares and then sell those shares to investors.

And then each year, those borrowers are going to give the special purpose entity this is just a corporation designed to kind of structure these mortgage backed securities they're going to give 10 of the billion, or 100 million back into this.

Of course, if enough people start defaulting, even these people start to get hurt.

The policy number of my insurance is PC two three five seven.