Commercial mortgages.

You take a bunch of mortgages, so you know, these are house mortgages.

Well, you take a bunch of mortgages.

Let's start with mortgages.

low defaults on mortgages.

And what they say is, well, they'll look at this big package of mortgages, these million mortgages that Bear

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

Since I now have bought these mortgages,

So these mortgages really haven't been defaulting.

Which are just a bunch of mortgages that are packaged together.

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

And I stick all of the mortgages inside that Special Purpose Entity.

So now the Special Purpose Entity is the owner of the mortgages .

The money is actually backed by people's mortgages.

But unlike mortgages, a lot of corporate debt, they just pay the interest.

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

And Bear Stearns is doing this for millions of mortgages at a time.

But my understanding is that most mortgages compound monthly.

Well, more money wanted to invest in people's mortgages.

You're not factoring in the tax deductions of mortgages, et cetera, of interest on your mortgage.

And they'll say, wow, these mortgages really haven't been defaulting.

And then Bear Stearns will package a bunch of these mortgages together, essentially IOU's from people.

So they're going to model the behavior, how many of these mortgages are going to default, all of that.

So we did the situation with mortgages, but you could do it with a bunch of assets.

They may feel confident, say, in taking out mortgages they really can't afford.

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

You can see willful blindness in banks, when thousands of people sold mortgages to people who couldn't afford them.

What do sub prime mortgages have to do with Atlantic Salmon, SUVs and globalization?

But Countrywide would say, well, we're already giving mortgages to all the people who qualify.

And then they blame the banks for being the bad guys who gave them the mortgages.

So Countrywide will issue even more mortgages, and give them to these investors with even lower standards.

I'm thinking about people's jobs, about their mortgages and pensions and their college funds for their kids.

In a lot of mortgages, when you pay your monthly payment, most of your monthly payment, at least initially, is the interest on the amount that you're borrowing.

And we said, OK on the assets side, had some government bonds, had some AAA corporate bonds, some commercial mortgages.

But you can imagine, if the economy gets bad enough, then a lot of these commercial mortgages are going to to start looking not so great either.

And a lot of the people who own commercial mortgages, they're actually getting a little bit worried right now because a lot office space is going free.

We know that especially since this was the riskiest slice of the CDOs that these could be completely wiped out, even if we only have a small number of defaults on mortgages.

And we can lower the standards, because we find even when we do lower the standards, no one's defaulting on their mortgages.

But we had to take those commercial mortgages that we thought were worth 10 billion, actually ended up being worth 9 billion.

likely to pay back. 10 billion of commercial mortgages, those would be loans for someone to buy an office building, or build an office building, or something like that.

So in order to actually find more people who want mortgages from us, we'll just have to lower the standards a little bit.

And then Bear Stearns will package a bunch of these mortgages up and now it's going to be in the billions and then repackage them and sell them to investors.

If you think about people and mortgages and buying houses and then not being able to pay for it, we need to think about that.

In fact, these 2 billion are actually based on assumptions from 2006 when housing prices can't go down and everyone was paying off their mortgages.

Well one example is, in this situation, if I did get a fixed rate mortgage and we learned, when you look at all those adjustable rate mortgages, we know that a lot of people didn't.