Interview of CBO Mortgage Whistleblower Pt. 1

Capital Account with Lauren Lyster

Good afternoon and welcome to Capital Account.  I’m Lauren Lyster here in Washington, DC.  There are your headlines for Wednesday, May 30, 2012.

Right now at the World Bank here in Washington, there is reportedly a global housing finance conference going on.   The theme is the importance of it.  Now, it is focused on emerging markets but how about a lesson in how housing finance can go terribly awry as we’ve seen in the United States.   We have the story that you probably have not heard behind robo-signing and mortgage-backed securities from a US government whistleblower that you haven’t seen on TV.  That whistleblower was fired from the US Congressional Budget Office which is purported to be nonpartisan and objective, remember.  Now, she believes it may have been because she gave an honest assessment of the issues facing the US economy that was at odds with what the CBO and perhaps its panel of economic advisers, including Morgan Stanley and Goldman Sachs, wanted to put out to the public.

So who are the CBO and Congress really serving?  She’s here to tell us why we should all be asking that question.  Remember that $25 billion mortgage settlement that was supposed to help struggling homeowners or victims of foreclosure abuse?  Well, homeowners are suing in one state so the money doesn’t go to filling state coffers instead of going to homeowners.  We’ll talk about it.  Let’s go to today’s Capital Account.

Today we have a story you probably haven’t heard. It’s behind the mortgage mess and foreclosure fraud in the United States.  Let me give you some background before we get to our guest.   In the past century, real estate law and transactions in the US have been subject to state regulations with mortgage documents recorded at the county level.  Now, this works relatively well in a traditional mortgage market like we had for most of American history.  The bank that issues the mortgage keeps the loan on its books until maturity.  However, this makes difficult, if not impossible, the type of financial engine nearing of mortgages we have seen in past years.  I’m referring to, of course, the slicing and dicing, the repackaging and reselling of homes in mortgage-backed securities and collateralized debt obligations, for example, that we saw during the refinancing credit boom of the 2000s.

Now, one glaring reason for this is that every time a financial product containing mortgages is sold, various state laws would require that the sale of the mortgage be recorded in the local county office.  This result in additional costs, of course, paperwork and perhaps most importantly, chain of title trails.  Now, eager to work around these barriers, the financial industry, with all of its innovation, created an alternative system for recording the issuance, the sale and the redistribution of mortgages.  That system is known as MERS.  You probably have never heard of it, at least I hadn’t.  It’s the Mortgage Electronic Registration Systems and it was founded in the mid-90s with the help of the big banks you see here, these are shareholders along with Fanny Mae and Freddy Mac. Now, MERS was created, this is straight from their website, by the mortgage banking industry to streamline the mortgage process by using electronic commerce to eliminate paper.  According to MERS, this would also help reduce fraud and less fraud means lower cost for all borrowers.

Now, it may actually have accomplished the exact opposite of its stated objective.  So let’s back up.  What this did was effectively replaced the recording and the tracking of mortgage ownership and the paperwork at the county level with a privately-controlled system for tens of millions of mortgages.  Once MERS was instituted, this is what happened.  Lenders were still required to file initial paperwork at the county, but with two key distinctions from how things were done in the past.  First, the paperwork did not need to be filed with the name of the lender.  Instead of Bank of America or JP Morgan or whatever, it said MERS.

That was substituted in place of the mortgage issuers.  Second and perhaps more importantly, any subsequent modification in terms or change in ownership of that mortgage, so what used to be paper at the county and everything was filed through the county; that instead would only be recorded now through MERS, through this database.  Making it effectively a black box for the securitization industry and for the trillions of dollars in mortgages that was subsequently be rolled up, cut up, and sold in complex financial products to pension funds and other investors.

Trillions of dollars in credit protection, let me remind you, was written on these very mortgages to adding another layer of exposure to a financial system run amok.

Capital Account TV Exclusive Interview of CBO Mortgage Whistleblower Pt. 1
mortgage expert witness

Telecommunications Essentials Pt 1

Welcome to the discussion of circuit switched wide area networks. My name is Dave and I’ll be instructor in this module. If you have questions, use the question/comment box on the Gogo website. Let’s get started.

In this module, we’re going to start with an overview of telecom and telecom circuits. We’ll take a look at some of the old technology that I guess many of us had hoped would drift into oblivion but we still need to do with the fact that a lot of modem type of technologies out there not just the type of modems that we used to use for low speed dial-up internet access. And we’ll talk about another type of circuits which technology and that is integrated services digital network.

So, in telecom, what do we need to – we’re talking about telecommunications here, but in circuit switching, what do we have is some basic building blocks to work from. Circuit switches and circuits are formed as bi-directional physical connections and they carry information at whatever the speed of propagation is on the medium, let’s say at light speed, I guess that’s true, but it’s not same as a speed and free-space but it’s limited to speed that can be transferred along the medium and turns out that what you need is the plastics that we encountered in wired transmission, lines and the refractor industry associated with glass optical fiber is the actual propagation velocity surround two thirds of the speed of light into free space. So, we can use copper or we can use glass for communications, methods if we’re going to a wired environment or we can actually use a wireless approaches we discussed in a previous module.

In our circuit switching here, this is an analogous to the PHY layer of datacom protocols. So, let’s take a look at what we actually are going to do here. We create and end-end connection and remember that online package switching and circuit switching, we formed a dedicated path from one in system to another in system and we patched through the switching and relaying devices internal to the networks. The actual in system connection can call on lines and the interconnections are groups of lines called trunks. The actual service providers in circuits switch technologies form meshes of circuits right matter there are redundant measures of interconnections and this makes them to the ability to provide reliable wide area connections at all times. The connection between the premises equipment for the customers through the circuits switches is part of the services provided and then the other part of the job of the service provider is to interconnect circuit switches within the network core. So, this I established connections from my device to the network and the network does the interconnection and then forms a connection from the other into the network out to the customer. So, the interconnection lines remember called trunks.

In circuit switching we have on-demand physical connections between circuits. The in system decide when to create a connection and as you’d expect, there is a set up delay but unlike packet switching there’s no store-and-forward mechanism and there is no error correction mechanism involve. The digital bits just move through the switches from insistent incest. So, we build and for this communications to take place. We obviously have to build the circuits’ end-to-end. And so, the circuits within this can be classified as dial-up or there will be a set up and tear down time or lease circuits and lease circuits are analogous to the premise virtual circuits we talked about. The lease circuits are permanent and yet they are set up for long periods of time based on a subscription contract or service level agreement.

With circuit switching, the connections are acting as bit-pipes and as such provide or introduce a minimal amount of delay and minimal jitter. In theory, we say there’s no jitter but no electronic devices perfect soldiers, perhaps there are some but very, very little. There is no attempt to quantitize the groups of ones and zeros. There’s no attempt to buy the system to require a frame. So, I can just pure an ongoing stream of digital information from one in system to another in system.

Now, in a lot of traditional phone systems that we have today, the ones and zeros not begin until we get to the local exchange which would be in the network lab so we would actually have an analog signal going back to an interface card at the local exchange. But, the important part is minimum possible delay in jitter, but there is no error checking.  And for real-time applications are error checking and error correction don’t make any sense. You don’t have the opportunity to retransmit or correct the error. You just have to attempt to deal with it by hiding it or ignoring it. So, this is ideal for a lot of real-time transmission such as voice.

Telecommunications Essentials Pt 1

The Biggest Mortgage Fraud in History Exposed Pt. 5

DAVE

The notes are basically on Wall Street, are being taken in and spun over anywhere from 9-30 times, maybe more.  We don’t know because they’re hidden in the MERS system.  The MERS Electronic Database keeps track of all the transfers, but none of these are recorded in the Land Records and this is what’s causing the problems with the title.

HOST

And they come take houses, as in some cases, not just when you are behind and then they fraudulently do it.  They just take houses that they never had anything to.

DAVE

Well, it could have been because of the fact that when I was talking to a title guy in Cleveland yesterday, he told me that we see a lot of problems and mistakes that were done because somebody who was preparing the warranty deed, put the wrong legal description on and basically, when they filed the warranty deed, all of the sudden, it looked like that there could be a potential slander of someone else’s title.  And so, when you are looking at a legal description that all of the sudden should say Lot 6, Block 7 but because of the fact that they are having a bad day and looked cross-eyed into the computer and didn’t have enough coffee and hit Lot 7, Block 7, all of the sudden, we have lien on the wrong property.  This is where you see a lot this backlash.

HOST

Yes.  I saw cases, just speaking in California and LA.  They are now having thousands of cases a year of innocent people being arrested because they just clicked your name in a bank robber or a child molester’s area and now your life is ruined.  It so Byzantine that no one can fix it.

DAVE

It’s going to take a least a century to fix this problem if we can stop MERS now.  I do know that there is movement afoot by many legislators who try to cut the MERS equation out of the record dating process…

HOST

Then what does that do to all the derivatives based on it worldwide?

DAVE

The derivatives generally don’t have anything to do with what’s on the Land Records.  They two distinct entities but I mean, you literally could go out if you wanted to and if it was available.  You literally could bet against the weather.  You can say, “You know what?   It’s known that it’s going to rain tomorrow but I’m going to bet against the fact that it’s going to rain.  I bet that it’s going to be sunny.”  So that when it comes to find out that it is not sunny, I’m going to collect on that bet. This is kind of what they did when they structured these loans.

HOST

I know, but I mean, if MERS goes under, they’ll lose more of the cases.  My point is, all these frauds are based on this fraudulent filing system.  From what I have read, the big banks are still doing this.

DAVE

Yes, they are.  This is a thing that we have to – the only thing that I could do because I can’t give you legal advice, I’m a paralegal and not an attorney, but having looked at this from a journalist’s perspective, the only thing that we can do is say no to MERS mortgages.  Just say, “I’m sorry, I’m not going to sign any mortgage paperwork if MERS is involved.”

HOST

So anybody that’s going to buy a house, anybody that is going to sell a house, or reify or already has a house that has a mortgage, you need to get the book, Clouded Titles at inforwarshop.com and read it.  It’s amazing.

Now, continuing here.  First off, here is the toll-free number if you have a horror story, if you have question that he can generally speak to.  We have lawyers on and they’re not going to speak on your case because they don’t know the particulars, so we can’t give legal advice but just general comments or what you would do if you have horror stories, or stories in your family or questions, comments or success stories, we love to hear from you.  The toll-free number to join us is 800-259-9231.  This is a big deal.  It affects our whole economy.  Clouded Titles, Dave Krieger and the book, 800-259-9231.  We will start taking your calls coming up in the next segment.  We will take about 40 minutes of calls.

Continuing, what are some of the other patriot mythology things?  Because people call me, they hear me for 17 years, they send me some of these big stacks of legalese and if I just announced this and that and filed this and I file, magically, bond money that’s under my Social Security Number will be sent to me.

[http://www.youtube.com/watch?v=bR98D3B9lBE]

The Biggest Mortgage Fraud in History Exposed Pt. 5
mortgage expert witness

The Biggest Mortgage Fraud in History Exposed Pt. 4

But imagine old ladies or people who don’t know what they’re doing.  I am certainly no rocket scientist especially 14 years ago.  I have learned a lot since then.  But if you have seen the cases on the news, I mean, we played this here for like CNN where they took in Florida a $1.2 million house that has been paid for a decade plus before with cash, never had a securitized note that it had been sold out in the market.  Explain this to people and let’s get in, as you were, to the Patriot mythology.  Some of the stuff were, “Declare yourself as sovereign of the realm of the Lord and file it”, and they will come and arrest you.  Because that was no different than what the bankers are doing.  If they’re engaged in fraud, you don’t go file something else.  You need to get this book, folks, because this has got a bunch of the cases that actually have succeeded and there are different types of fraud going on.  Please continue, Dave.

DAVE

Sometimes it gets very ugly.  We see cases like the one in Stanislaus County, California where the woman is trying to protect her parents’ house.  It’s in the final stages of foreclosure and you know, these well-meaning souls out there, I call them “patriot paralegals” type up these documents thinking that they can use the UCC common law and basically, they move outside the system’s tools to attempt to enforce their way on the system.

HOST

And the system immediately recognizes that it’s not within “kosher” systems.

DAVE

Exactly and these is what causes the problems and as a result of her filing these documents in Stanislaus County, the District Attorney had her prosecuted.  We’ve have instances, numerous instances that I’ve run across in the state of Texas where somebody has gone in and had written and filed affidavits after the trustees deemed the property was foreclosed.  It was sold.  The trustees’ deed was filed and so instead of fighting it at a detainer hearing which would be the next thing, gets kicked out of your house and so we have to do a forcible detainer hearing.  What ends up happening is this particular person files a whole series of documents starting with an affidavit, rescinding everything that has already been foreclosed on.  Well, it’s a little late for that.  When she went to the county clerk to record it, there was somebody who didn’t even worked at the Clerk’s office that looked at the documentation and said, “I don’t think I’d file that step if I were you.”  She went ahead and did it anyway.  When I got to look at it, I was just like scratching my head going, this is paralleling the case in Stanislaus County.  A judge literally…

HOST

There are a bunch of scammers.  I know a bunch of patriot paralegals who are winning in court and who are having success.  But they’re following cases that have won. They’re following systems that are there.  There is success there as well, but there are a bunch of lawyers – I’ve seen countless cases now that are having victories.  The point is you want to go with real instruments that point out the fraud that the bankers are engaged in.  Don’t counter their fraud with your own made out garbage.

DAVE

Well, look at the Country Land Records as a sacred vault of documents that basically represents a person’s chain of title, from the time they took possession of it and were given a warranty deed all the way up to the current state and condition of title.  Through this chain of title assessment seminars and stuff that I do, I teach people to go in and analyze step by step from the warranty deed forward, to see how many times the chain of titles had been affected.  One of the things that we are seeing is, the more you go out and borrow, reify, reify, get a heel lock and reify; the worse condition the chain of title becomes, because you have more outside third parties interfering in the chain and filing documents that appear to be legitimate when they are anything but.

HOST

Let me ask you this, how bad does it get?  Because there are different economists, experts and lawyers and some of the lawyers that have won in court that you mentioned in your book.  They talk about how many times in derivatives the securitized loans are being sold and the fraud that these groups are holding.  How many times are they selling these titles on average?

The Biggest Mortgage Fraud in History Exposed Pt. 4
mortgage expert witness

The Biggest Mortgage Fraud in History Exposed Pt. 3

MERS, actually only is a computer database that, for all intents and purposes, tracks the sales of these repetitively as they occur on Wall Street between the parties.

The unfortunate thing about MERS, which it admits by the way, is that is not a substitute for the Land Records.  All it is, is an electronic database that is used by its membership subscribers which is kind of like the credit bureaus, if you ever wonder who inputs the data on the Credit Reports, well these are all these members subscribers of the credit bureaus that have access to this information.  The credit bureau is entrusted through the Fair Credit Reporting Act to basically keep track and make sure that everything that is being reported is accurate, which is why we have the dispute process.

You know, just to look just at the opposite, MERS does not have this kind of government regulation as due the banks.

HOST

So it is not a real deed registration. They created it so they could run these scams and sell the deeds over and over again.

DAVE

Well, they sell the mortgage notes over and over again.

HOST

Exactly.  How many times exactly?  But it is the same thing in the final equation?  Wouldn’t it?

DAVE

Well, actually no.  Your mortgage note, it was really sad to hear that…

HOST

I know they’re two different things but they come back to court and try to take your house with it?

DAVE

Exactly, but they try to come with part of the equation, not all of it.  This is one of the things that the attorneys who are studying these stuff and sharing this information with me, they’re telling me that they’re trying to get the entire equation put together and do it in such a way that the judge will believe it because right now…

HOST

So they are engaged in perjury, fraud and constructive fraud, but the issue here is that for years now, they’re getting clocks cleaning courts all over the place and that’s what you break down on your book.

DAVE

A lot of them have been.  We have a few significant cases where the homeowners have won.  We just had a Rico-style action happen down in the Gulf Coast of Florida.  We have an appellant attorney down there in Englewood that actually won a case.  It is Elizabeth Coursen and you know, it has been circulating around the Internet.  I’m sure that if you type in Coursen, you’ll see that case.  We actually defeated a motion to dismiss there on the appellant level, basically we’ve reversed it.

We are having a few victories and then of course, we have some of the sad consequences of what happens to people when they go on and try to fight this thing on their own and they file documents in the Land Records that are not appropriate.  As I was sharing with you before we went on the air Alex, this woman in California filed a document in the Land Records in an attempt to stop a foreclosure of her parents’ home.  Now, she was convicted of two felony counts and sentenced to a year in jail.

HOST

Stay there.  We are going to come back and break that down because there are people out there on the Internet that will tell you stuff like this.  This is the power of common law.  You are filing and swearing to something.  Let me tell you, it is fraud if it’s not true.  Now, the banks are doing it, but just because they’re engaged in fraud, doesn’t mean we now run to beat them and engage in fraud.

BREAK

Dave Krieger is the guest in our studio.  You have literally hundreds of trillions of dollars worldwide by the Chinese government, Russian government, European governments and pension funds.  This is also done in Europe to some extent, though not as bad as here, but some countries are even worse from what I’ve read to where it’s all just fraudulent. I remember, they make you put money in escrow to pay your property taxes.  On my first house like 14 years ago, I moved into this little-bitty house that I had put my money in.  About a year later, I was told that my mortgage had been sold two or three times  and it’ is finally Bank of America.  Every few months, it’s a new place to — back then, it was send the check in and then they said, “You don’t have $3,000 or whatever it was on escrow.”  I hadn’t checked the escrow.  We did.  They’ve taken the money and then they would let me know that they are starting proceedings to take the house that I have put money down on and have been paying on for a year and half or so.  I had to go get a lawyer and send them a letter and threaten Bank of America.

The Biggest Mortgage Fraud in History Exposed Pt. 3
mortgage expert witness

The Biggest Mortgage Fraud in History Exposed Pt. 2

Yes.   It is $50 trillion they made off derivatives.

HOST

By the way, you don’t add here, you are Vietnam veteran, combat veteran.  What was it like for you to see the country become this corrupt?

DAVE

You know what?  From a Vietnam vet’s point of view, it is sad that we have to see all these stuff that went over there.  I mean, first off, most of the vets in Vietnam didn’t even know why they were there.  In most of the stuff I was involved in was involved with Army security agencies and so I don’t talk about that.  It is just one of these things where as far as combat goes, you know, we didn’t see a lot of that.  We were more behind the scenes.

HOST

You were more of an Air America capacity. (Laughter)

DAVE

You got to love that.  You got away with that one.

HOST

Loving government, huh?

DAVE

I got to love it.  Air America, Black Ops, all of the other good stuff.  We know that there is some amount of that going on but…

HOST

It is a very loving government.

DAVE

The bigger problem we have now is trying to…

HOST

I have some family in Army security and you know what they did in the US?

DAVE

I’m ears.

HOST

I said it before.  I’m not going to get into it.  Anyways, we will be right back ladies and gentlemen, stay with us.

BREAK

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HOST

Here it is.  Deed, who really owns your home?  Over 700,000 or that 70 million?

DAVE

70 million.

HOST

70 million titles.  I can’t read that, it is so big.  The property is clouded.  Is yours one of them?  This book can help you find out and fix it.  I use information similar to this book to make sure with my house that I had that.  It goes on to break it all down, Clouded Titles, new updated edition, with case studies and cites and Dave Krieger is our guest.   It is available at infowarshop.com.

As I was saying, an invaluable book to have.

Okay Dave, this is a short segment, the long segment coming up.  Break down how the scam worked, what happened, what MERS is and let’s get into the usual suspects.  I mean, it seems like everything the Attorney General is involved in it, even back during Clinton, with his law firm.  He was Deputy Attorney General, getting all these change, where this is going and let’s go into the patriot mythology, getting a lot of people in trouble versus real stuff that’s in your book and then let’s take phone calls.

DAVE

Sure.  Well, Alex, the thing started in 1995.  It was a concept of how can we basically control, track and transfer these mortgage notes on Wall Street. So Fannie Mae, Freddie Mac, the Mortgage Bankers Association, American Land Title Association and all the major banks got together and came up with a game plan and they got Covington and Burling law firm in Washington, DC to issue an opinion letter and basically, what it did was it gave what we call Mortgage Electronic Registration Systems or MERS claims to do what it’s doing in America.

What in essence happens is that when you go to the closing table and you sign this piece of paper which represents a mortgage or deed of trust, there is an 18-digit MIN number or MERS Identification Number that is the property of MERSCORP Holding, Inc. that appears near the document title.   The things that we have been trying to do is to get people to recognize this, which is one of the fundamental reasons I wrote the book because if you knew what the consequences were of getting a MERS loan or MERS mortgage.  MERS doesn’t have anything to do with the actual mortgage note itself.

The Biggest Mortgage Fraud in History Exposed Pt. 2
mortgage expert witness

The Biggest Mortgage Fraud in History Exposed Pt. 1

For the next hour and twenty minutes as I said, we are joined by a guy we had on the radio a few weeks ago on the nightly news and back by popular demand.  Dave Krieger is a former major market radio news reporter right here at News Radio 590 AM where we’re on.  He is a news director, television news reporter, anchorman and investigative journalist who has won National State News awards from Associated Press Broadcasters.  Dave was a former member of the Radio Television News Directors Association and began studying law in the early 1990s.

He just found out about all this fraud with the titles and everything and so got into that.  He has been working with some big law firms and has been at the national news, that’s how I found about him, beating the big banks. Now, he has been putting on these big paralegal events where lawyers come to learn from him.  The newest incarnation of his book, Clouded Titles is 396 pages of the latest with court cases that are winning strategies that will win and not get you put in prison.

So it’s very, very exciting.  Lawyers are buying this by the case and so are the lawyers handing them out to their clients.  It’s for sale at infowarshop.com or 1-888-253-3139 and we have it discounted, I think by $10 off the regular price at infowarshop.com.  It is the lowest price anywhere where evil capitalists care.  So be sure and check it out at infowarshop.com.

I just want to say to Dave, you didn’t build this.  You didn’t write this book.  You didn’t go to all the seminars.  You didn’t go interview all the lawyers.  You hadn’t worked for many years at a law firm up in Dallas, fighting this.  You have done nothing.  Would you like to thank Obama for writing your book?

DAVE

Of course, I would.

HOST

Good.  Would you like to thank government for giving birth to you?

DAVE

Actually, the government – Yes, you got to love that.  The government actually helped me out a lot.  As a matter of fact, if it wasn’t for the government and all the shenanigans that have been going on with the big banks and these issues that we are finding out now with Eric Holder and Laney Brewer and the Justice Department ties, we now have a new white paper.

HOST

They did this too, so they didn’t build it actually.

DAVE

We have a new white paper that’s out now by the government accountability institute that actually has gone into detail and has a working model, 27-pages long that goes into detail about the MERS, Eric Holder, Laney Brewer, the DOJ, SEC connections.

HOST

Okay.  Let’s explain further.  Most of the listeners understand this, but we got millions of listeners so there is probably 300,000 – 400,000 people listening for the first time right now.  So, give it a few minutes — skip the break because I’m late.  I need to stop doing this.  I’m out of control.  You know, we can’t skip the break.  Give us just a breakdown of what is happening, the history of this and then give us the latest on the loving DOJ.

DAVE

The basis for writing the book was the fact that I started to see a pattern.  In 2006, I got out of my last mortgage in October of 2006, right before it was going to reset itself as one of those adjustable rate mortgages.  Basically, what was happening was in 2003, when this whole nonsense started, the promotion had been that everybody needed to, and this is part of the brain game, where they put this idea in your head that you need to own a house and it doesn’t matter whether you have a job or not.  That’s why they have these “ninja” loans which are no job, no income, and no assets.

HOST

Do they have that for cars and anything else?

DAVE

Exactly.  You just tell us how much money you want to make and we’ll put it down and we’ll get you a loan for that.  They got these programs out there that are all tied to the securitization market and they use a vehicle called Mortgage Electronic Registration.

HOST

Then they tie these packages of total crud and get government to invest your pension and everything else in that holds you hostage.

DAVE

Exactly, then you find out that your 401 case has been depleted and they’re paying you back at 10 cents to a $1 after you sue them.  In essence, that’s how this…

HOST

They don’t care because they got the fees, swapping all the derivatives crud.  Plus the SWAT team is standing by if you don’t like it.

The Biggest Mortgage Fraud in History Exposed Pt. 1
mortgage expert witness

Finance: Examples of Finance Pt 6

Let’s say you run a hedge fund and some investor comes to you and says, “Oh, things are terrible. Look at all the money you lost for me last year. I know you’re doing great this year and you’ve made it all back that you lost last year, but I don’t want to run that risk. So, I want to give you my money, a billion dollars, I want to get these superior returns you seem to earn, but you have to guarantee that you don’t lose me a penny. I don’t want any risk.

I want a principal guarantee that when I give you a hundreds dollars, you’ll always return my hundred dollars and hopefully much more, but never less than a hundred dollars.” So, is there any way to do that? You know that you’ve got a great strategy, but of course it’s risky. You could lose money. You’ve lost money a bunch of times before. So, how can you guarantee the guy that he’ll get all his money back and still have room to run your strategy? Well, it sounds like you can’t do it, but of course a lot of people want to invest that way, so there must be a way to do. So, you’ll figure out – we’ll learn how to do that.

So, three more short ones. A scientist discovers a potential cure for AIDS. If it works, he’s going to make a fortune. He started a company. He’s a Yale scientist, he’s – medical school, started this startup company. Yale, of course, is going to take all his profits, but anyway it’s his startup company and if his thing really works, he’s going to make a fortune. If it doesn’t work, it’s going to be totally zero. You calculate, and let’s say you believe your calculation, that the expected profits that he’ll make if it works, the probability of it working times the profit, that expected profit is equal to the profits of all of General Electric.

Should his company be worth more than General Electric, the same as General Electric, or less than General Electric since it’s got the same expected profits? Well, I can tell you the answer to this one because I think most of you would think, first you’d think, “Well, maybe the same.” Then you’d say, “Well, this AIDS thing, it’s so risky. It’s either going to be away up here or nothing. And that’s so risky, and General Electric is so solid, probably General Electric is worth more.” But the answer is the AIDS Company is worth more. So, how could that be?

So, another question, suppose you believed in this efficient market stud and you rank all the stocks at the end of this year from top to bottom of which stock had the highest return over the year. It’s 2010, let’s say 2010, this year’s a weird year. So, let’s say you do it in 2010. All the stocks the highest return to the lowest return. Now, suppose you did the same thing in 2011 with the same stocks?

Would you expect to get the same order, or the reverse order, or random order? Now again, if you believe in efficient markets and the market’s really functioning the prices are fair and all, I’ll bet most of you will say, you won’t know, but you might say it should be random the next time because firms only did better or worse by luck, but that’s not right either. So, you’re going to know how to answer that question by the end of the class.

One last one, the Yale endowment over the last fifteen years has gotten something like a fifteen percent annualized return. A hedge fund, that I won’t name, has gotten eleven percent over the last fifteen years counting all its losses and stuff like that. So, is it obvious that the Yale endowment has done better than the hedge fund? Would you say that the Yale manager is better than the hedge fund manager? Its return was fifteen percent. The hedge fund only got eleven percent. So, I’m asking the question, and I would say that David Swensen would think about it the same way I think about it.

So, suppose I even told you that the Yale hedge fund had lower volatility – the Yale hedge fund? – the Yale endowment had lower volatility than the hedge fund, which it surely does, would that convince you now that the Yale endowment made been managed better than the hedge fund? Well, we’re going to answer this question again, and you’re going to see that the answer’s a little surprising. It won’t be so surprising – I wouldn’t have brought it up otherwise. But anyway, that’s the kind of thing that in finance you’re taught to think about.

Finance: An Experiment Of The Financial Market Pt 3

Here’s what happened. Mister seller ten sold to thirty six at a price of twenty. Mister seller nine sold to buyer twenty. So, nine, there is no nine. Nine sold to twenty at a price of what? Six. That’s okay. So, seller six sold to twenty at a price of twenty. We won’t ask who buyer twenty is. Buyer twenty is going to screw everything up.

So, buyer fourteen through- I can’t read this either. Buyer fourteen sold to buyer forty four for twenty, and buyer twenty sold to buyer forty for twenty two, and seller twenty four sold to buyer thirty for twenty five.

So, five people traded now which five were they? The sellers were ten, six fourteen and twenty four, the bottom five. The five buyers were thirty six, twenty, forty four, forty and thirty. So, basically forty four, forty, thirty six, thirty six didn’t buy, twenty bought instead.

So, if you look at it, so it’s not quite the way theory would have predicted, but almost. If you look at it, if you just shuffle the order and you put the sellers, instead of from top to bottom, you put them from bottom to top, you get what looks like a demand curve and a supply curve. And so, what happened? All these five people ended up selling, one, two, three, four, five, those are exactly the sellers. The price they sold for was all between twenty and twenty five and the five buyers were forty four, forty, thirty six, thirty. Twenty six didn’t manage to buy, but twenty bought. So, what is the theory of the free market? The theory of the free market says, “This chaotic situation where they had less than two minutes to decide what to do could be analyzed as if you put a demand curve together with a supply curve and there was one price that they miraculously knew.

Here it should have been twenty five. It turned out to be twenty or twenty two that all the trade took place at. At that one price you get all the trades happening. The people have the highest valuation buyers they’re the one who get the tickets. The people with the lowest valuation sellers sell it. So, the people who end up with the tickets are these red guys at the top and the blue guys at the top. All the tickets go from the people who value the stuff least to the people who value it more. So, the market has done an extraordinary thing in two minutes.

So, there was one mistake. Mister or miss twenty, whose identity we are protecting, although I’m searching the faces, mister or miss twenty got a very bad deal. She or he, let’s say he, bought at twenty when the value was twenty. That was a horrible deal. He didn’t get any extra out it. So, he should probably have only bought if the prices were lower, and then twenty six would have bought instead of twenty. So, twenty sort of squeezed his way into the market, so twenty six and twenty between them somehow there was a slight inefficiency.

But, basically with no training, no background, no practice, these sixteen undergraduates managed to reproduce – they gathered all the information in the whole economy, and they discovered who were the eight people who valued the tickets the most and they ended up with all the tickets. For me to do it and sort it out would have taken longer. The market solves a complicated problem and gets information incredibly quickly, and put things into the hands of the people who value it the most. And the marginal buyer thought it was worth about twenty five or twenty and that’s what the price turned out to be.

So anyway, we’re going to come back to this parable at the beginning of the next class.

Finance: An Experiment Of The Financial Market Pt 3 

Finance: Examples of Finance Pt 5

So, even though I think that my expected profit is positive, because he’s putting up three hundred thousand to make only two hundred when they’re even odds. The fact is it’s such a big number I’m a little worried about that.” So, what do you do? So, what can you do? You’ve got these friends who are willing to bet at even odds. Each game by game, so how much money – presumably the first night you’re going to bet with one of your friends. You take the guy’s bet, the customer, you take his three hundred thousand. You promise to deliver him five hundred back if the Yankees win and to keep it if the Yankees lose. What should you do with your friends?

Should you bet on the Yankees with your friends? Should you bet on the Dodgers with your friends and how much should you bet at even odds the first night? So, the answer is, well, I don’t want to give all the answers now, but so there’s a way of skillfully betting with your friends and not betting two hundred or three hundred thousand the first night with your friends at even odds. You bet some different number than that, which you’ll figure out how much to bet so that if you keep betting through the course of the World Series, you can never lose a penny. How do you know how much that is? Well, that’s the kind of clever thing that these finance guys developed and you’re going to know how to do.

So, let’s do another example like that. I’m running out of time a little bit, but an example. Suppose there’s a deck of cards, twenty six red and twenty six black cards. Somebody offers to play a game with you. They say, “If you want to pick a card and it’s black, I’ll give you a dollar. If it’s red, you give me a dollar.” So, if I’m picking, I’m in the black, I get a dollar, it’s in the red I lose dollar, I have to throw away the card after I pick it. The guy says, “By the way, you can quit whenever you want.” So, should you pick the first card? It looks like an even chance of winning or losing. Let’s say you pick the first card, it’s black, you win a dollar. Now, the guy says, “Do you want to do it again?”

You picked a black one so there’s twenty six red left and twenty five black. So now, the deck is stacked against you. Should you pick another card?  Well, it doesn’t sound like you should pick another card. But, you should pick another card and I can even tell you how many cards to pick. Even if you keep getting blacks, you should keep picking and picking. So, how could that be? It sounds kind of shocking. Well, it’s going to turn out to be very simple for you to solve halfway to the course.

So, a more basic question. There are thirty year mortgage now you can get over for five and three quarter percent interest. There are fifteen year mortgages you can get for less, like five point three percent interest. One’s lower than the other. Should you take the fifteen year mortgage or the thirty year mortgage? How do you even think about that? Why do they offer one at a lower price than the other?

One more example, suppose you’re a bank and you hold a bunch of mortgages. That means the people in the houses, you’ve lent them the money and they’re promising to pay you back. And you value all those mortgages at a hundred million dollars. The interest rates go down. The government lowers the interest rates. Half of them take advantage to refinance. They pay you back what they owe and they refinance into a new mortgage. So now, you’ve only got half the people left. Let’s say all the people had the same mortgage and everything. Half the people are left. That shrunken pool, half as big as the original pool, is that worth fifty million, half of what it was before or more than fifty million or less than fifty million? How would you decide that?

Again, this is a question which might be a little puzzling now, but actually you should be able to get the sign of that today even, and we’ll start to analyze it. So, that’s what mortgage traders have to do. They see interest rates went down. A bunch of people acted. The people who are left in the pool are different from the people who started in the pool. Now, we’ve got to revalue everything and rethink it all, so how should we do that?

Finance: Examples of Finance Pt 5