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 have 4 billion in residential CDOs, collateralized debt obligations.

I think it's a distraction.

I have a whole video on mortgage backed securities.

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

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

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.

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

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

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

We would create incentives for securitization.

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.

This is highly rated mortgage backed securities, maybe they have a slightly higher interest rate.

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.

Or, it could even buy completely different assets, it could maybe buy mortgage backed securities, and the point here isn't just to increase the money supply the point in quantitative easing is maybe to kind of smooth over what's happening in certain parts of the market and so they thing that there's log jam in the mortgage backed security market that's why they're participating there.

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.

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.

We would lower standards on what it took to get a mortgage.

What we are going to do is go buy things like highly rated mortgage backed securities, or things like commercial paper, AAA corporate debt, so that those things, the interest on those things goes down.

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.

These were conforming loans, there wasn't this whole CDO and mortgage backed security market.

Before we proceed further and get a little bit better understanding of why maybe some of these investors were so keen on investing in mortgage backed securities, essentially loaning this money to all these people who are buying these ever appreciating houses, I think we need to a few more tools in our tool belt.

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