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you okay we want to finish up today with our discussion we were talking last time you remember everything we talked about up to now has been about banks and banking and the general discussion that led into that was how do we deal with asymmetric information answer banks make loans and can deal with asymmetric information but then what I said is there may still be a certain percent of borrowers who need funds who can make a good case for funds but banks cannot perfectly deal with this asymmetric information problem and sometimes then the government gets engulfed involved and so we started talking about GSEs government-sponsored enterprises and a typical story here is government is helping people or companies but borrowers who are quote worthy gain access to credit that they could not get access to just by going to the bank and taking out a loan or some loan company and so forth and I gave the example last time of a student maybe you need $50,000 to go to college over your lifetime maybe you're gonna earn an extra if you have a college degree an extra ten or fifteen thousand dollars a year for the next 40 years so you're gonna earn I don't know four hundred thousand dollars over the course of your career in higher earnings and so it's a good investment to invest fifty thousand dollars and going to college you're gonna get back four hundred thousand dollars but a bank is reluctant to make that loan and the reason is that you come in and you don't have collateral and the bank has no guarantee that you're gonna finish college the bank has no guarantee that after you do finish college you're gonna get a job and so forth and so then the banker says no long now I know banks do make loans to students but it's because of things that the government does is what makes that possible if we go and take all the government out of the story there are going to be very few students who could go out and get loans okay so anyway and the same thing would be true for people wanting to go to a medical school and so forth without any government involvement at all it'd be very difficult for people to do them so anyway government-sponsored enterprises I believe last time I put a just a couple of names up there if in in a federal National Mortgage Association and you remember I said the popular way of pronouncing this FNMA federal National Mortgage Association fannie mae and then there are a series of other GSEs government-sponsored enterprises that have this acronym attached to it G in M a I think government National Mortgage Association and its function is very similar then there is it's a Federal Home Loan Bank I'm not exactly sure how that turned into the oh by the way let me put this in here Ginnie Mae and then there's the Federal Home Loan Bank anyway Freddie Mac it's the Student Loan Marketing Association they are the ones that are the GSE that's involved in making it easier for students to get loans you remember did I tell you their name last time Sallie Mae so they've got all these funny little names yes sir Indy Mac that was a private bank I believe but not one of these GSEs and I believe that's now bankrupt anyway and when I say it is now bankrupt you could say that about some of these organizations also anyway but they I think that was a private organization okay so the government and I don't know how much we're gonna get into this but so the government's trying to encourage certain our oars make it easier for those borrowers to gain access to credit this is one way of doing it is setting up by the way there's also the the Small Business Administration and I don't have some you know cute name with May or Mac or something like that for them but the Small Business Association is making it possible for small businesses to get funding and so forth so we really like homeownership we really like not like it but we're trying to encourage homeownership we're trying to encourage going to college we're trying to encourage small businesses okay this is one way of doing it there's another way that government helps borrowers get access to credit and sometimes that's loan guarantees okay and so that is really separate from this but the loan guarantees would be something like hey go to the bank apply for a loan and then basically you can tell that banker that if you can't pay we will step in we the government and make sure that lender does not lose and so there are VA and FHA loans on homes and so that is a separate thing this is by the government setting up these associations and we're going to talk more about these GSEs here in just a second this is the first Fannie Mae was the first of these GSEs I believe I told you 1938 is when it started so here we are during the Depression period okay basically here's how the GSEs work not in every single case but this is general you've got a GSE okay and so start it off there's nothing there and the government comes out and creates this and sort of smiles on them says we're behind you and the GSE in most cases what it's going to do is it's going to be chartered as a corporation and it's going to issue some stock it's going to be set up as a corporation but this is a special corporation or the government says we're with you we're behind you and so there's an implicit sometimes it's X posted at the very beginning but later on that's kind of withdrawn it becomes an implicit kind of a guarantee for this government-sponsored Issa's government-sponsored enterprise it's not government-owned in theory it's sponsored by the government but we're gonna set up this business we're gonna charter it's gonna be run like a business but they've got a guarantee of the government standing behind it and that guarantee counts for a lot and so what the GSE does is this it says hey we need some funds and I've sort of drawn a picture of banks before and here's the dollars coming in through deposits and here's dollars going out to loans this is a financial firm so the dollars come into the GSE by when they issue bonds so here's the bond issued and so there are investors standing out here right investors and the investors receive these bonds from the GSE the Fannie Mae bond the Freddie Mac bonded Ginnie Mae bond and so forth and then the investor hands over cash to the GSE so now here's this financial institution of the GSE it's got money I'll put a little star up and said oh they've got the government guarantee these bonds these Fannie Mae bonds boy those are safe bonds because the presumption is this this is just not some company out here that issues a bond and maybe they go broken that's it you lose the presumption is this bond is as good as a Treasury bond that the United States government will stand behind it that's the presumption and that being the case when they issue bonds it's got a low interest rate the coupon rate I don't know maybe 3% 4% whatever but a low rate maybe if there was some private issuer that they would have to pay five or six percent but maybe Fannie Mae Ginnie Mae Freddie Mac so forth they can borrow and three or four percent okay because of this government guarantee the reduction in default risk now here's the GSE and let's say that they've got a billion dollars just hypothetically they've now got a billion dollar from issuing a billion dollars worth of bonds so what they do is they contact banks and others maybe a savings and loan and so forth okay maybe a credit union and they say hey you all you know we're just letting you know that we've got some cash Fannie Mae we've got some cash here and we want to buy mortgages we're investing in mortgages and so these bankers say and by the way let me come over and draw this little picture that we've seen before here's an interest rate and here's dollars and you remember we talked about this concept of interest risk and then we put this years to maturity down here and what we notice is that if interest rates go up we said bond prices go down but also just the value of mortgages goes down write the value of loans goes down and no longer the term and mortgages are long-term 30 years in most cases the longer the term of that loan the more the loss and the value of that mortgage okay so anyway imagine making a home owned at 5% today if you're the banker you will end the money for 5% what you basically say is I'm willing to receive 5% on my loan for the next 30 years and then if interest rates go up to 6% what you say is oh man if I had not loaned my money out for 30 years at 5% if I'd waited until the day I couldn't loan that out I'd be getting 6% an extra 1% a year for the next 30 years is that much well if it were a hundred thousand dollar loan an extra 1% would be an extra $1,000 for the next 30 years that's 30 thousand bucks ooh so the point is that if interest rates go up then the value of that mortgage to the banker is less because the banker is locked in lousy interest rate so bankers hate this getting locked into these long-term deals they hate taking interest risk interest rate risk market risk they hate taking that kind of risk and so here's Fannie Mae's and we're buying mortgages and bankers are saying you know we were locked in we owned our money out for 30 years and we were locked in a 5% let's say now we can sell these and we don't have to be locked in so here's what we're gonna do we're gonna send some mortgages to Fannie Mae Jenny Mae Freddie Mac we're gonna send them some mortgages and we're gonna get some cash and basically this kind of a transaction is going to occur I'll put a little piece of paper there and then cash this kind of a transaction is going to occur over and over again more and more mortgages are going to be sent by these financial institutions that are making loans they're gonna sell those mortgages to Fannie Mae okay and that way they are not locked in the banker says good I am NOT locked into this long-term deal yes sir the profit on the mortgage would be basically for all of the stuff that happens up front yeah and it's like you know all the stuff that they get for booking that loan is what they would get you know for making the mortgage and it might be if it's a hundred thousand dollar mortgage they might make $300 $500 or something like that well in theory in theory well but the thing is this organization they do care about what the mortgages look like because this organization says I'm not buying any mortgage it's got to meet certain standards okay in this organization the the GSE Fannie Mae in this case it sets the standards okay so anyway so now the bankers have reduced interest rate risk and they have also I talked earlier about how do banks make a profit by taking in deposits making loans but the last thing I put on that list was off-balance sheet activities well this is now off the balance sheet they made a home loan this banker did made a home loan and then sold that loan and they've reduced this to a fee they're basically making a fee for upfront booking this loan doing all the paperwork and so forth getting all the signatures and all the guarantees and you know like filing something downtown with a recorder of the deeds and so forth and so all of this stuff is the bankers done for a fee basically okay so this is the nature of Fannie Mae what Fannie Mae has done is borrowed a billion dollars and then bought a billion dollars worth of mortgages how many mortgages is that let's say these are $100,000 mortgages and I'm just making up a number let's see these are $100,000 mortgages how many of those in a billion dollars there'd be ten in a million right and in a thousand millions to make a billion so ten thousand of these hundred thousand dollar mortgages is what Fannie Mae would buy at their billion dollars okay so here's the motive of the banker we want to get rid of interest rate risk now here's the deal though the banker may be the one an investor that's buying these bonds and if the bankers buying the bonds the bankers got that interest rate risk back we some of it but then what's happened is this is the banker said hey I was lending in you pick some town Paducah Kentucky I was lending money in Paducah Kentucky to people buying homes there and if something happens in the local economy kind of turns down I'm in trouble so if what I will do is let's say hypothetically sell a million dollars worth of mortgages to Fannie Mae and buy back a million dollars worth of these Fannie Mae bonds I'm still making loans in the housing market I'm still incurring interest rate risk because I'm still buying bonds that are a long term but now what I've done is I've diversified my risk I don't make all my loans in Paducah Kentucky now I'm buying in effect a little bit of bonds from everywhere or a little bit of mortgages from everywhere and I can't go to New York City in California and all that and lend money I'm in Paducah Kentucky but by buying one of these bonds in effect I'm buying some shares of home loans made everywhere and so I diversified my risk and there's an advantage to that the other thing is this without these organizations Fannie Mae Freddie Mac and so forth this is ill liquid if I need cash forget about interest rate risk sometimes I just need cash let's say a really good customer comes to me and says hey I need to borrow some money I go gosh I don't have any money you're gonna lose a customer if you're in a town and there are some really good customer in town that you've been doing business with here's what they expect out of you you're my banker yeah I'm your banker I can come to you any time I need something yeah you can come to me anytime you need something we're pals and so here's this really good customer and they come in Sunday and go hey I need a loan how much you need 10 million dollars you don't want to go oh I don't have 10 million dollars I am so sorry but that bank across the street does won't you just go over there and make that your bank no don't say that what you want to say is sure have a seat can I get you something to drink you want a cupcake you want like coffee tea what can I do for you okay and so then what you want to do if you're the banker if you've got liquidity you just slice a here to fill out this paperwork but if you don't you say why don't we get started on this paperwork and I don't know in the next couple days we'll have all this kind of process and you'll have your money don't even worry and what you want to be able to do if you're the banker is if need be take whatever assets you have and sell them and get some cash you need liquidity banks need liquidity well look what the bank has done if they had a mortgage and they can sell that mortgage and then if they take that cash and buy some of these bonds if this is the same bank as sold the mortgage and now they buy the bond they got something now where they can sell it there's a market out there where these bonds are trading all the time and so if somebody comes in says I need case you say okay and you get a bond and the selling to some money so we've added a liquidity in this market and not only that but you can at this point now that we had these organizations you can just sell your mortgages right out oh sure I can come up some money I'll sell off a hundred mortgages or whatever I have to do okay so anyway what I'm saying is this is that the creation of this organization creates liquidity in the market for mortgages and what does that mean bankers want to be liquid they need to be liquid and so when bankers say mortgages are liquid now Fannie Mae did that Jenny made did that when mortgages are liquid bankers say I feel good about making a home loan even if they're gonna hold on to it you make a home loan you're taking interest rate risk but if you're willing to run that risk hold on to it hold it for a day a week a month a year or three years seven years 11 years here's what I know anytime down the road I want to get rid of that mortgage I can sell it to Fannie Mae now if we go back we had a couple chapters back we had a graph like this we had funds funds supply and demand and so our analysis comes in here suppose that we and I'll put a little star over here suppose that there are some types of loans and we add liquidity those loans here is a mortgage and we say boom we create Fannie Mae now mortgages are more liquid than before then there is a tendency to say oh I like th
se kinds of loans more than I used to this is the lender I like that was more than I used to because those are now more liquid assets then they used to be greater supply of funds and now what happens interest rates down we've added liquidity to the mortgage as an asset and when that asset to the banker becomes more liquid the banker likes that asset more and the bankers are willing to make those loans more and so interest rates go down and let's go back that was what we were trying to do is encourage home ownership and the way we're encouraging it is we're lowering interest rates in that market that maybe we would have had an interest rate of I'll pick a number out 6% and now maybe it's five and a half or five and a quarter or something like that we have lowered interest rates in that market by making mortgages more or liquid and before they were like the least liquid of assets you loan the money it's gone for 30 years goodbye see you again in three decades but now it's here's a loan I can have my money back tomorrow next week next month next year anytime I want there's somebody buying these things I like these assets more of these loans and since I like them more I'm willing to make them more greater supply of credit lower interest rate and now we are encouraging homeownership and so that's really I mean there are several reasons that bankers have to participate but all these things that make bankers feel good about mortgages I can diversify my risk I can if I want avoid interest risk and I can basically get cash liquidity anytime I want all these things that make mortgages look better to bankers says increase your supply of funds in that market and that means lower interest rates yes sir well we do want to get into all the details of SBA versus the others they all have their standards yeah but there are standards there but you have got to if you want to sell a mortgage or a small business owner or a student loan or anything else to the GSE you've got to meet the standards of the day okay and historically those standards have been pretty high now I'm gonna add one thing to the story and it's this in 1970 these bonds became mortgage pass-through bonds I said bass through I'd be alone the Bass Pro Shop passed through bonds and there's not a whole lot that we had to story other than this Fannie Mae Jenny me and so forth they started saying this after 1970 hey we'll sell you investors some bonds we're gonna take the money that we received from those bonds and buy mortgages and now you investors that are holding on to our bonds every month now we're holding these mortgages then that means they're a homeowner's way over here that are paying their monthly mortgage payments and so the monthly mortgage payments are frequently going through the banks and then passed along to Fannie Mae and then Fannie Mae says hey if you're holding a million dollars or a hundred thousand dollars or whatever ten thousand worth of bonds whatever bond you're holding on to when we start collecting these monthly mortgage payments with some interest in them and so forth we're just going to send that to you and so the people holding on to these bonds are kind of like shareholders and they are just receiving a constant stream of income and so like if I own one of these bonds I'm kind of like a banker there's people way over there and let's say there's this pool of a million dollar a billion dollars worth of mortgages and I own ten thousand dollars worth see I give myself a hard calculation and see 1/100 so this would be one 100,000 if I owned a $10,000 worth of bonds $10,000 then this is one 100,000 of this pool of mortgages that we bought and so at the end of the month Fannie Mae is going to collect a bunch of payments coming in on those mortgages and they're gonna send me an individual investor 1 100,000 of all of the mortgage payments that came in in life and in a sense I'm lending money out now it took that money had to go through the GSE and the back but I'm standing back here and I am basically making home loans and I'm receiving money a steady stream of this and the problem is if there's somebody way over here that says well I can't make my home loan or my mortgage payment I give up I default then nothing comes to the banker nothing comes to Fannie Mae and then nothing comes to me on that one the only thing is hey I've got one one hundred thousand share and all these things and so if somebody over there doesn't pay off since I only own you know some home owner I only own one one hundred thousand if it's a hundred thousand dollar loan then I only suffered the loss of one dollar so that's not much so I diversified my risk and that's what I was also telling you about bankers have diversified if the banker is the one who buys these bonds the banker has diversified risk and gosh one person if you're running a bank and one person says I can't pay anymore I default on that loan that's a significant loss but if instead what I did is I sold that mortgage took the cash and bought a bunch of these bonds there could be some defaults and that really wouldn't hurt me that much I've diversified my risk but these are mortgage pass-throughs okay and so here's the long and the short of it this became very popular it became popular for bankers bankers love this because they like to get rid of that interest rate risk they don't like to be locked in on these long-term loans where they just hold on to the cash or hold on to the the loan and interest rates up and the value of the bond the mortgage goes down they don't like that they don't like have on all their wrists tied up in a relatively small number of loans in a small geographic area they do like liquidity so if a banker wants to be making home owns and have that kind of asset on their books then they're more likely to the money sell the bond and then come around here I'm sorry sell the mortgage to Fannie Mae and then come around here and buy a Fannie Mae bond and now they've got that kind of mortgage debt on their books but it's liquid debt that they can always sell and they are not and they are diversifying their risk among many many different loans this is a it's not at all strange but it's all strange kind of how it got started you were going to say something how does it make its money well over here they are getting mortgages that were you know like maybe the mortgage you got a 6% interest rate on it and Fannie Mae can borrow money at a very low interest rate because this government guarantee and so there's a difference in the interest rates of what they're lending at versus what they're borrowing at and by the way Fannie Mae and theory can borrow money cheaper even than banks again they're not passing through all their profits there you are passing through some of this stuff but they are nevertheless well let's don't get into the details of it but anyway they come out ahead because what's happening now is this is that the shareholders of Fannie Mae are feeling pretty good hey we're borrow money cheap more lending money I had a higher rate and the shareholders are doing pretty good because of the government's guarantee okay and the reason that government's guarantee is so important is if this were just some company out there and they're just on their own then what you might say is hey let's get in or not let's start evaluating how much risk is in this mortgage pool that they're holding on to and if there is risk then I don't want to borrow or I don't want to loan my money to Fannie Mae at 3% I need to have four or five percent they're kind of doing some risky stuff well with the government guarantee it's like now who cares risky not risky they're not gonna default on these bonds so this is the way it went for years and years and years here's where things went wrong bad and it's a bigger story than just this but here's where things went bad under pressure from Congress and under lack standards by their regulators Fannie Mae started saying will accept mortgages that are not quite so high-quality a little bit more default risk and then more and then more and then more and the way this happens is and you'd have a hard time going to actually find something in the official documents this is all done informally somebody who is running Fannie Mae would come up before the Congress or maybe somebody from the Congress it sends some staff member over to see them and say you know wouldn't it be so nice if poor people could own their own homes and then Fannie Mae who's got these guarantees from the government that makes it all possible for them to be so profitable Fannie Mae starts going you know I see your point and so then Fannie Mae says we're buying mortgages just like always but now a little bit lower quality mortgage would qualify and then the bankers say oh okay we're gonna make loans that used to be we wouldn't make we think default risk is too much we're gonna make loans that we wouldn't have made and so now lower quality loans are being made that seems okay for a while but then the economy goes into a recession and then people who are let's say already kind of risky borrowers they start saying to the banker I can't make my mortgage payment and when they didn't make their mortgage payment the dollars don't come into Fannie Mae and when the dollars don't come into Fannie Mae Fannie Mae doesn't have anything to pass through and I don't mean to say this is like everybody defaults but I mean default rates are getting up in the neighborhood on some of these subprime loans the lower quality was the fault it's good enough 10-15 percent well and so people not making their mortgage payments Fannie Mae is not collecting pana me he's not sending this along and now people are starting to sell those bonds we don't like these bonds they're not generating the income we expected and then now that Fannie Mae is not passing that money along and people are trying to stand back there and Fannie Mae is riding off well we got some bad loans here let's write those off our books and then when Fannie Mae is writing loans off their books the shareholders who own Fannie Mae start going hey we're not gonna have a big profit this year I'm gonna sell my stock and the price of Fannie Mae stock starts going down their net worth is going down they're writing off bad loans their bonds are kind of getting stinky shareholders are selling the shares and so in I guess was 2008 Fannie Mae and Freddie Mac said hello crisis and that's when we tested to see whether the government was really gonna stand behind him or not and the government did stand behind him but they basically said you know we are gonna take this thing over you guys have been private enterprise we're gonna take over not all the shares of stock or anything but we're gonna take over management of this and Fannie Mae and Freddie Mac you're no longer independent the way you used to be we've got some really new tough regulations on you the shareholders lost more or less not everything but maybe 90 percent 95 percent of their investments and it all came about because of a couple of things and one is Fannie Mae under pressure lowered its standards of the types of mortgages that it would accept or buy and then the other thing was we got into a recession not only a general recession but a recession in the housing market and that caused people those two kinds of recessions a housing market recession and just the general economic recession caused people to start defaulting on these had they never got into the subprime loans or lower quality loans then an economic downturn would not have been nearly so uh so damaging to him but there was a bubble in the housing market that was across the United States and that's part of the story too anyway without getting too much into that story here's the GSE and the government spent I'm not going to be able to tell you right now how many hundred billions of dollars but lots bailing out Fannie Mae and Freddie Mac they were going under due to these losses until the government stepped in and said we can't let them go under on the other hand we can make of where the shareholders feel punished and I cannot tell you I can look it up but I'm not going to but the shares of stock in Fannie Mae Freddie Mac these shares of stock we're selling for I'm gonna throw a number out there 50 dollars a share and now they're selling for a dollar 25 or something like that so the people who own Fannie Mae Freddie Mac they took a beating too okay so anyway this is just one little bit of a financial mess that we found ourselves in and a lot of it was associate with housing now there's another part of the financial mess and it's not GSEs but you should know because it comes along at the same time of the story the same type of story that we've been talking about so here's Fannie Mae Jenny Mae Freddie Mac here they are buying mortgages and creating bonds that are backed by the mortgages so then some investment banks came along and they said that's a good idea and so the investment banks went out and they created a bunch of bonds and they said we're gonna sell these bonds and we're gonna use the proceeds to buy mortgages and so they started basically doing the same thing as the GSEs and then they got into the subprime loans that is to say buying high-risk mortgages with that money and then when the the housing market went south and the economy got into a recession they started suffering losses on our poor and they started turning around going sorry and so these bonds lost value they suffered losses their shareholders suffered losses so several of them were brought to the point of bankruptcy some did go out of business and others were just absorbed purchased by big banking companies so we had a lot of financial failures I mean big not like you know the local dairy queen or something like that i'm talking about institutions that were hundreds of billions of dollars in assets and they got into this kind of business and bad loans I mean they bought bad loans that lost value high default rates 10 15 % and so then they couldn't make the payments their bonds became unpopular and then there's more to the story some of the purchasers of these bonds whether they're Fannie Mae or Freddie Mac bonds or mortgage-backed securities from investment banks some of those purchasers were banks and so those banks are sitting around holding onto these bonds and those are pretty safe and then all of a sudden they weren't and now those bonds are losing value and so there were banks that lost hundreds of millions or billions of dollars on their bond portfolio mortgage backed bond portfolio and some of them were put out of business so I'm saying that there was a combination of things one is there was a bubble in the housing market housing prices got quote too high speculatively high we've everybody knows about how the stock market could get high and in crash well the housing market got high and crashed and so that crash in the housing market meant a lot of these mortgages went bad that there was defaults on them and then everybody who was buying those mortgages and the banks making the home loans they were losing money and in in addition to the bubble in the housing market there was a recession and so those two things together really did a lot of damage to those who were either holding mortgages on their books or mortgage-backed securities on their books and also create a lot of losses for those that were creating mortgage-backed securities and so all together we're talking I don't know trillions of dollars worth of losses trillions let me come back to this and I don't have a number for you but way over fifty percent of all home loans you think of all the banks we've got seven thousand and some banks in the United States seven thousand let's say we've got twelve hundred savings and loans we got thousands of credit unions all the mortgage is being made all of them the millions of mortgage is being made over half of them end up in the hands of a GSE Fannie Mae Freddie Mac Sallie Mae Freddie Mae Freddie Mac Ginnie Mae over half and so these are huge institutions and so when this housing market is crashing and we go into a recession then the losses are not insignificant the losses are huge questions about this now the other thing I was going to talk a
out and I still them but now it doesn't take so long because we've talked about the subject here is this general concept of securitization of loans we've been talking about loans in general when we talked about banking that's what banks do is make loans and we just talked about the securitization and that's what this is about the securitization of one kind of loan mortgages so what we do is we create a security that is backed by mortgages the people who buy it are buying a share in the assets being purchased by this organization and the assets being purchased or mortgages okay that creates liquidity and the market for mortgages makes those more desirable brings down the interest rate also allows diversification and so forth okay well so that started off with mortgages and it spread into other areas as well car loans credit card debt what student loans these are the big ones so what I'm saying to you is this whole process and I'm not trying to trying to talk about the financial crisis that we've been through over the past decade but this whole process of securitizing loans you see what I'm telling you is there is a security backed by an asset the security is this bond it is backed by an asset that is held by the bond issuer and the bond issuer got that asset by using the proceeds of selling the bonds to buy that asset this organization doesn't do anything I mean it doesn't manufacture furniture it doesn't own land it basically sells bonds gets cash and buys financial assets loans and then the people who get this bond own a share of these loans and if there's good news in the loans there's good news on the bonds if there's bad news on the loans bad news on the bonds and this organizations is passing the dollars through yes sir well with the mortgages we've gotten and the student loans we're getting some GSE that's doing a lot of this but when we start talking about that car loans and the credit card debt these are just mortgage banks that are usually doing this that are just saying hey we'll sell a bond we'll get some cash and we'll buy someone's okay and so in that case it's a mortgage bank it's a private company that's securitizing these loans the GSE was started by the government the first one Fannie Mae in 1938 okay but the idea was popular the idea succeeded and so then these private these investment banks want to get in the business and you know that is if we think about the economy and I you know our economy goes through cycles like this and if all our economy and its moving along a trendline if the economy stayed on that trendline there's a lot of ideas that will work great and that's that's the end of story they just work great but what happens is we have this sort of these booms and busts and overtime or along the trend line but not always and what will happen is or something that's a great idea if you're on that trend but it doesn't work out so well in practice because sometimes there's this euphoria that gets built in and people go nuts over something and then it turns around and people go bankrupt and so that's kind of been our story here and this is a process that's in place and what we're doing is we're getting away from this idea of the banker makes a loan to a banker is basically makes a whole bunch of loans sells those loans off to somebody else that's somebody else issues bonds and the banker buys those bonds the banker is still making home loans but not well I mean the banker makes it but gets rid of it the banker still in the home own business but not so much by holding the mortgage but by holding the ball right and they're still in the car loan business but not so much by holding the car loan but by selling the car loan then bind the bond issued by the mortgage bank that issued that bond and the thinking is I'm liquid and the thinking is I've diversified my risk and once they say I've diversified my wrist they kind of think this I'm not taking any risk and that's right they're not taking any risk if we stick on this curve but as soon as we had this situation where default rates went up to 15% uh-oh she took a lot of risk you pretended you weren't taking risk and by the way a lot of these bonds the Fannie Mae and jenny-may had this government guarantee but the mortgage banks were getting very high credit ratings like triple-a and so forth when what they were holding was really risky mortgages and the people bunnies going oh I got triple-a paper no you don't you got like be a paper and they found out about that when the economy turned around but anyways so this is kind of a trend and it's kind of superimposed on the whole banking industry and savings and loans and so forth I think that's where we'll stop for the day and we'll talk more about banks next time it's so long
