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

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

The mortgage...

So just in kind of our everyday personal finance world, your mortgage is actually secured debt.

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

Most of the loans we're familiar with in our personal

Let's say it's um let's say its 10 billion of commercial mortgages.

So let's think about how we manage our money.

So right here are a whole bunch of people's mortgages.

why.

And that caused housing prices to go up.

Well I have the original mortgage on my house.

I suffered from my mortgage loan.

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

This is really the tip of the iceberg.

It's only worth 100,000 now.

Let's say I'm some type of the Investment Bank.

We all have heard of it.

Well everyone knows that it's not going to be exactly 10 .

You're assuming interest only loans.

So, each of these is an investor.

And that company has the right to payments that are secured by mortgages.

What does it mean, derivative?

Now what are my liabilities?

But for the simplicity of this argument,

Right?

Remaining mortgage on the home, 1 07,000.

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.

You can actually do this type of a structure with any type of debt obligation that's backed by assets.

Your address in Brooklyn, the payments on your mortgage, how long you've been a member of the NYPD.

I am right now thirty four years old and

And when they default, what is kind of the recovery?

So when housing prices go down, that's the only situation where really you should have foreclosure.

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

And why does that matter?

So let's say I have another group of assets.

Can I go out there and I buy a whole bunch of mortgages.

I paid off the mortgage when I got my promotion.

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

And then when we go and get the property because the

loan, because this isn't a traditional loan, an interest only loan but for the sake of this presentation, how it's different than a mortgage backed security, the important thing to realize is that the bank would have kept the loan.

So I stick them all inside of that.

They sell it to Bear Stearns.

But maybe that's not enough. Maybe the economy is still tanking.

I've essentially become the lender to the home owner, and so the home owner's morgage payment will now come to me the Investment Bank .