CW 243 – “House of Cards” with William Cohan
Jason Hartman interviews author, former Wall Street senior banker, and best-selling investigative journalist, William (Bill) D. Cohan on the events that led up to the current economic crisis. Bill explains the choices that the big firms, such as Goldman Sachs, JP Morgan, etc, made regarding what type of institution they were going to be, the path of these firms that led up to the current crisis, and how they used the bailout money gifted to them. He said it was one big party on Wall Street, during which brokers were to bring in revenue using a lot of whacky products, until everything came crashing down. Huge bonuses were paid out from the revenue collected from unsuspecting clients. For more details, listen at: www.JasonHartman.com. Bill and Jason also discuss the Occupy Wall Street Movement. Bill expressed disappointment in the message of the movement, saying it isn’t clear and they need to learn how Wall Street really works so that they can be more effective in bringing about reform. Wall Street has been influencing what goes on in Washington and paying lobbyists and donating to congressional coffers so that they can get the regulations, or lack thereof, that they want, i.e. the Dodd-Frank Wall Street Reform and Con-sumer Protection Act. Bill talks about how the expansion of Wall Street into Middle Class Amer-ica was not an accident, using the example of Merrill Lynch being a public company. This ulti-mately led to broken trust between Wall Street and Main Street, as people have now shied away from risk taking.
To solve the problems, Bill suggests changing the incentive system on Wall Street, in that it can no longer be okay to take huge risks with people’s money or get paid big bonuses whether they lose money for the firms or not, as well as going back to having to use their partner’s capital to operate. William D. Cohan offers audiences a unique, close-up perspective of the greatest finan-cial crisis since the Great Depression. He combines deep knowledge of the investment banking world with the fine storytelling skills of an award-winning investigative journalist. Bill’s new book is titled Money and Power: How Goldman Sachs Came To Rule The World, a revelatory history of Goldman Sachs. His previous book, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, lays out in gory detail how the financial crisis began with the collapses of Bear Stearns and Lehman Brothers. The Last Tycoons: The Secret History of Lazard Frères & Co. won the 2007 Financial Times/Goldman Sachs Business Book of the Year Award for its candid revelations about how Wall Street works. He should know; he spent six years at the firm. Bill Cohan has a long-time insider’s in-depth knowledge of investment banking—he was a Wall Street banker for 17 years. In addition to his years as Associate and then Vice President at Lazard Frères, he was a Director in the Mergers & Acquisitions Group at Merrill Lynch and a Managing Director at JPMorgan Chase. He left JPMorgan to write The Last Tycoons, which appeared on the bestseller lists of The New York Times, The Wall Street Journal and USA Today. It edged out Alan Greenspan’s Age of Turbulence to win the FT/Goldman Sachs award. Bloomberg.com and The Evening Standard named it Book of the Year. William D. Cohan writes regularly for The New York Times, Vanity Fair, Fortune, The Daily Beast, ArtNews, and The Financial Times. His columns have also appeared in The Washington Post. He is a contributing editor for Bloomberg TV and is a contributor to Bloomberg View. His series of articles on the controversy of the ‘recently discovered’ Degas plaster casts in ARTNews won the Silurians 2011 Excellence in Journalism Award.
Introduction: Welcome to Creating Wealth with Jason Hartman. During this programJason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing. Fresh new approaches to Americas best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine self-made mul-timillionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it. And now, here is your host, Jason Hartman, with the complete solution for real estate investors.
Jason Hartman: Welcome to the Creating Wealth Show. This is your host, Jason Hartman, and thisis episode number 243. Thanks for joining me today as we talk about the house of cards. Our guest today will be talking about some very intrusting staff when it comes to our financial system and you know we kind of go back and forth on the Creating Wealth Show where sometimes we talk about really practical things that are very much relevant to what you specifi-cally as an investor want to do. For example, I think it will be our nest epi-sode, number 244, where we’re going to have a case study from one of our clients and hear first hand what our clients are doing and we got a few of those interviews recorded.
So thank you so much, those of you listeners out here who stepped forward when I asked if you would be interested in being on the show and we appre-ciate you and we appreciate your willingness to give and share your advice and your experiences with other investors so they can hear it really from the person who is out there actually doing it, not from a person who is recom-mending it like myself or a person who has anything at stake. You’re just a totally neutral person who just wants to share there experience and that’s just really great that you are doing that.So we have some of those showscoming up but we also have some more educational shows like today’s show where we will talk about with a guest expert and author on the house of cards that is are modern financial system.
So we get into that here in just a moment but few things before that,someinteresting news, articles, quotes, things I have received in my email box that I thought I would share with you and so forth. First of all, a couple of quotes, a couple of good quotes.You know I love quotes. Do you like quotes? I think the reason quotes are so great is that they sum up in such a short sentence or two. They embody alot of philosophy in the.So two quotes that I just want to share with you today. One is this one and it goes, success means having the courage, the determination, and the will to become the person you believe you are meant to be George Sheehan. Now, that oneis great, and I got another one that’s just for memory here that I lived by for many many years and I remember it came out of Robert Allen’s old old creating wealth book where he had 52 quotes on the back, one quote for every week of the year and it goes somethinglike this just for memory here.Successful people make decisions quickly as soon as all the facts are available and change them very slowly if ever unsuccessful people on the other hand make decisions quickly and change them often. And isn’t that the truth though you know people out there in your life who are constantly fleet-ing from one deal to another? They’re doing this, they’redoing that and fla-vor of the month and that just doesn’t buildalot of credibility among one’s sphere of influence, same as true in our own lives and with ourselves.
We need to have the determination to make a decision as soon as we see an opportunity, we evaluate it, we gather the facts, and then we actually exe-cute on it and we do something about it, becausesuccess in life is not really ever, so far that I know, except a few lottery winners and things like that.But usually actually, you read those studies about lottery winners.They usually end up broke just a couple of years later even if they win a zillion dollars. So you never seemed to hear any of those lottery winners parlaying their winnings into big fortunes and becoming the next Donald Trump or Sam Zell or – Sam Zell is a big real estate investor or the next Snow Gates or anything like that and turning them into something big, you know? They usually just blow their money. So life doesn’t come in those sudden brakes.It comes in the daily effort of doing things well and making good prudent decisions every single day we go along and sticking with thosedecisions and following them and seeing them through.
You know one of the best things my mother ever said to me when I was growing up and I used to hate it when she said this to me. As a kid,it used to really annoy me but she always said, “Jason finish the job”.Finish the job, because you know how kids are.Kids will start something and you know, they just – they will follow through for about 5 to 10 minutes and then they get bored.If you have the children or if you ever were a kid yourself, which ofcourse everybody was, you know you might remember may be the exam-ple of getting a pet or getting a pet for your kids and the common pet thing goes something like this.You know, I don’t have kids but I know how it works as far as this goes. The kid says, “Oh you know, please get me a dog, get me a dog, I want a dog” right? “I’ll talk care of the dog.I promise, I’ll do everything.I’ll walk the dog I’ll feed the dog.I’ll give the dog baths and everything right”. And that happens for about two weeks and then suddenly the parents are ending up taking care of the dog right?Typical thing.Finish the job, okay?So that’s a great quote about what it really takes to be success-ful.It’s the simple daily progression towards a worthy goal and it’s showing up every day and just doing the thing.
Earl Nightingale – I love Earl Nightingale, such a classic. He passed away back in 1989 but he was really one of my big mentors in life, Dennis Whaley, Earl Nightingale, Jim Rhon, ZigZiglar, all of those sort of old mo-tivational speakers that were really famous in their day but have sense.They’re not as well-known nowadays. And what I love about those speakers is that they were about philosophy, embodying a set of ideas. Where is nowadays, most of the stuff you hear out there in the market place, it’s a very specific and technical.And on show number 150, I interviewed, you know, one of my big mentors, Dennis Whaley, on episode number 150 of this show, the Create Wealth Show, go back and listen to that if you wish. I said that to him.You know, most of the education out there nowadays is very specific and technical in nature rather than philosophical and I believe you need a balance of the two. But regardless of it, if you get all of the technical knowledge, if you don’t have the philosophy which is the foundation, the belief system, which is the foundation over the context in which the content of that philosophy of that technical knowledge would be the content. The philosophy or the belief system would be the context.You put all the greatest content in the world into something and if the context is not supportive of the content, the content will not flourish or it will just completely die.So that’s what’s so important about philosophyIn Earl Nightingale. If you don’t know who he is, go look him up. Nightingale Conan has a great website.You can buy all his old audio recordings. I mean he is before my time okay?But I just think he was awesome and Jim Rhon and Dennis Whaley, ZigZiglar too. So just a thought there, arandom thought there, that quote we started out with.
So technically speaking, on more of the technical side here today,interest rates. Wow. Wow, wow, wow. I recorded an interview with DanHammer-man. We’re going to have him back on the show here soon. I recorded that this morning and we were talking about how valuable the mortgage asset is, it’s just, just incredibly valuable.And you look at this associated press article out.It says, “Mortgage buyer Freddy Mac said Thursday, that the rate on the 30-year home loan was unchanged at 3.87%”. 3.87%, that’s the lowest level since long-term mortgages began back in the 1950’s. I mean folks, if you don’t stock up on long term fix rate investment grade that right now, you are missing the boat, so make sure you do that.
Another article that was interesting and this one, gosh, one with dsnews.com I don’t know where I even got this. I think it was one of the newsletters I clicked on. Anyway, this article is kind of interesting.It says, “housing now” – What’sinteresting about this before I go into this article is that, since we know income property is a multidimensional asset class.We can play this either way. It does not matter to us asprudentincome property investorsbe-cause when we do it right, we are going to benefit regardless of how this plays out.Now this article is kind of optimistic. And optimistic or pessimis-tic either way, whether it is easier to buy a property or harder to buy a prop-erty, we’ll make money, because we know how to do it, okay?We know how to adapt to the market and play the game regardless of the cards we’re dealt.
Voltaire, another great quote, something like this, the English SAS a couple of centuries ago,Voltaire said, “One cannot choose the cards they’redealt, but must choose how to play the cards in order to win the game”.And that’s exactly what we do. I have somethingthat I talk about in the Creating Wealth seminar, in the Creating Wealth home study course called the three dimensions of real estate. And just showing how some multidimensional asset class and they’re really more than threedimensions but pack three di-mensional. That sounds pretty good. It’s sort of catchy and asa multidi-mensional asset class, we know how to play it either way. So what’s inter-esting about this article is that it’s pretty optimistic right?It says, “hous-ingcrisis to end in 2012 as banksloosen credit standards.Capital economics expects the housing crisis to end this year according to a reportreleased Thursday. One of thereasons,loosening credit. The analytic firms notes, that theaverage credit score required to attain a mortgage is 700”.So that is 700 FICOscore right? Well this is higher than scores required prior to the fi-nancial crisis. It is constant. Actually,I think they meant to say consistent with requirements one year ago.
Additionally a fed senior loan officer survey found credit requirements in the fourth quarter wereconsistent with the past three quarters. However, the mortgage market indicators point not to just a stabilization of mortgage lending standards, but also aloosening of credit availability. Isn’t this what we all have been waiting for?Supposedly, Ben Bernanke and TurboTax Timmy Geithner get up there and they keep saying the banks have got a loan but of course, they give them a – This is my commentary obviously. They give them a bunch of bailout money, a bunch of taxpayer money printed and created out of thin air that the government doesn’t even have into the tril-lions, and they have no actualtechnical legal requirements for them to loan money.They just give it to them trillions of dollar and hope that they will do the right thing and win. It’s unbelievablyridiculous. I mean who in the right mind would do a business deal that way where there is no requirement on the other party right?
Okay enough of my ramp and myfrustration, back to the article. Banks are now lending amounts up to 3.5 times borrower earnings.This is up from a low during the financial crisis of 3.2 times borrower earnings. Banks are also loosening loan to value ratios that otherwise known as LTV, loan to valu-eratio, which CapitalEconomics denotes as, “the clearest sign yet of an im-provement in mortgage credit conditions”, in contrast to a law of 74% reached in the mid-2010. Banks are now lending at an 82% LTV orloan to value ratio. While credit conditions may have loosened slightly, potential home buyers are still struggling with credit requirements, my comment here folks. Tens of millions of people have seen their own credit scores, either none intentionally or completely on purpose through strategic defaults.They have seen them decline and this I say benefits us as investors big time,because while lots of people used to have credit scores above that 700 FICO score mark or 720 mark, nowadays not so man, and a lot of it was purely by choice through strategic defaults okay?
So this benefits us.Why? Because it forces more people into the renter pool. Remember, the great thing about our asset class that we love so much in-come property especially when it comes to housing related income property, single family homes, apartment complexes, the reason it’s so great is because people have so few choices.You can either buy, you can rent, you can be homeless and jokingly, you can live with your parents. Okay? And so that obviously is good for us right? When it’s harder to buy, rents increase.
Dan Hammerman and I talked about that this morning. By the way I rec-orded another show today you can find very interesting when we publish it, which is about the solo 401K and breaking out of 401K jail. I know a lot of you listening are in 401K jail with your company and your retirement plan, and we have a show coming up on that very subject and we are also going to talk about it at Meet the Masters in March. But anyway, just finish this arti-cle of, it’s almost done. While, credit conditions may have loosened slight-ly,somepotential home buyers are still struggling with credit requirements.In fact,Capital Economics points out that in November, 8% of contractcancel-lations okay?In other words, where the property went under contract, went into escrow when it was sold, were cancelled, were a result of the potential buyer not qualifying for a loan. Additionally, Capital Economics says,”Any improvement in credit conditions won’t be significant enough to generate actual house price gains”. Well hey, fine with us as investors, nobody is motivated to buy because they don’t think the prizes are going up. They can rent from us. Either way, we understand that’s amultidimensional asset class, we know how to play the game. So any way, that’s enough from that article.
Another thing I got interesting and this is actually a friend’s company a friend of mine that I have known for many years back in Orange County. I will not say the name of his company because I don’t think his deal was very good, you know? He has been pitching me for a while to recommend his hard money loans or his private lending deals. And listen to this deal, okay? This compared to the private lending or hard money that I can introduce you to. I think it’s a terrible deal compared to our deals okay?So I will just tell you about this. This is a new second trusty, meaning you’re in second posi-tion as the lender and you know what? When it comes to being a lien holder and mortgage holder, I do not like being in second position. I’ve done it many times. I lost money one time on it as a lender that’s why I’m not, nuts about being a lender. But you know,I didn’t really understand it as well then as I do now, and I think my lending now, I really like the lending that I’m doing. And you know,a lot of you clients, I know a lot of you listening are doing lending through the introductions that I have made for you and many many of you have expressed interest in it. And by the way in a moment, I’m going to talk about some do diligence and somerequirements I want you to put in your private lending just to reduce your risk. But let me tell you about this deal first and why I think it’s a lame deal.
So this is a second trusty. I don’t like being in second position.It only pays 10.875%, which is not very good frankly. I mean of course,that’s far better than anything you are probably going to get on Wall Street, far better than the bank for sure.It’s a lot better than the bank by a multitude of thousands but it’s still not that good and here is why. This property is a single family home in Beverly Hills.It’s 14 million dollars and they want you to loan a se-cond loan, a second trust deed on this property of $980,000. So this is the big league folks, this is big money we are talking about right? There is the first on the property of $5,345,000,bringing the loan to value ratio to 45.18%. Now that is a good LTV.It’s very good but on a property, on a big property like this, a single family home, these are highly risky deals okay? Plus you are in second position.
So here is what happens when you are in second position. If they default on the first loan,you don’t have the right to foreclose.To gain that right, to buy that right and again, I’m not a total export in this okay, and I’m not a lawyer. So this can vary from to state to state but justgenerally speak-ing,conceptually speaking, you’ve got to manage the default on the first loan.So you’ve got to pay the payments on the first loan to keep the first lender from foreclosing first,because if they foreclose first, you could be to-tally wiped out and get nothing.That’s why being in second position can be very very risky. And in second position for a borrower with they say good or fair credit on this 18-month long loan, you get 10.875% and folks, I think that deal stinks.It’s not nearly as good as the twelve and an eighth that you can earn through our group on much smaller loans. So even if an investor came to us and said, “Hey I got a million bucks I’d like to loan”, I would ra-ther see them diversify to different providers and different properties and differentgeographies, which is what we can do for you by referring you our vendors and they’re much smaller, much more salable properties than one big property in Beverly Hills. I mean folks, that deal it may be fine but I wouldn’ttouch it with a 10-foot pole. So there you go.
Now, a couple of things I want you to know about hard money lending and this will be a short thing here, but if you ever do hard money or private lend-ing, I want to give you a few tips on that as a do diligence check list and somerequirements you want to make of the borrower. Number one, always use an escrow company or an attorney depending on the geography.Some places use attorneys,some places use escrowcompanies. So use one of those as a neutral third party.Number two, get and evaluate comparable sales info or inactualappraisal so you are comfortable with the loan to value ratio or the LTV, so that you feel you got a good margin of safety in there. If possible, and by the way, I want to say this is not necessarily always possible to this next one, but if you can, it doesn’t hurt to do it and that is get a prelimi-narytitle report. Why is it not always possible?Becausea lotof our vendors are buying these properties at foreclosure auctions and they need to be fund-ed almost instantly, so you can’t, there is not time to get a preliminarytitle report sometimes. But if you can get it, get it.Try to get it alright? Number four, require a closing protection letter or a lender’s escrow instruction showing you the lender in the first lien position.Again,I don’t like being se-cond place in this mortgage lending. I want to be first lien but you need a closing protection letter, and a lot of people don’t know what that is. So just call it a lender’s escrow instruction and that should be signed by the attorney or the escrow officer, showing you the lien holder in first position okay?And require a lender’s title policy. So that’s a title insurance policy that protects you, the lender, so that you know there are nootherliens on the property. And then finally, only wire money to the attorney, the escrow, or the title company who is doing the transaction. Donot wire the money to the bor-rower directly okay?So a couple of things there that can protect you and re-duce your risk when doing private lending or hard money lending.
But folks, the returns are phenomenal.It’s simpler thanowning the real estate. I do like owning the real estate myself much better. I think income property is much better than being a lender, but for a quick easy simple scalable things, if you want to deploy a lot of money and you want to deploy it quickly, and you want it to be simple, the lending is great for that,especially the short term lending. But even if it’s longer term lending, it can still be pretty good. You’re going to do a lot better than you’re going to do in the bank for sure and you’ll probably do a lot better than you do pretty much anywhere else except owning the property directly.
Okay, a little sign here that the economy may be recovering. I don’t that it really is. I don’t sort of hard or really address that issue, and you know, we sort of do that overall on the show with all the guestsI talk to, so I’m not go-ing to doveinto that right now. But one sign that there is money slashing around out there again I think, is the fact that you’ve got all these sort of somewhathokey deals out there and that’s where you hear thesecompanies again. I didn’t hearthem for years and now, they’re all back, they’reon the radio selling like ranch lamb and lakefront property in theseobscure are-as.You know, I got one here. They came in my email box.It’s called Ten-nessee Land and Lake. And again, you know, I’ve never seen these proper-ties. I’ve never cheeked them out. They may be a great deal. I doubt it but they are calling this the initial public offer rating okay?And they say you can buy lakefront properties starting at $99,900 and they say this property is sold from 2005 to 2008 upwards of $1,000,000.
Now here is the scam on that sometimes okay? It’s not this exact property, it’s some property,somewhere near it, might have sold for that.It could have been a different size of parcel, adifferent location, etcetera, et cetera. So you can buy this dockable lake front properties starting at $999,900, you can buy the private wooded locations starting at $24,900.Folks, I’ve looked at some of theseproperties like this. Groups have asked us to sell them.Again, I’m not referring to this specific property which may be fine. I really have no idea.This is called like Legacy Shoresorsomething but I’ve been out to de-velopments that appear to be like this, and let me tell you something. They buy these lots.They’re in theboonies.They buy theselots for nothing.People will go in there and they will buy these lots in mass for $1000 each and resell them for $25,000. Again, you want to buy a rental property, you don’t want to buy crap in Belize. I know, one of my competitors sells this staff but look, listen. I went to Belizelast year and I looked at these properties.There is no rental market in Belize.If you liked this sort ofCaribbean-kind of lifestyle where it’s sunny and you got beaches, I mean frankly, I think it’s a third world country okay? I’m not a fan of places like that. But to reach a zone, if you want to kick back on the beach and check out a civilization that might be okay, but there is no rental market for these properties. These are not investments, this lakefront property in Tennessee. Show me where the employment is, show me who my renter is okay? I want property that rents to people, that produces income. If it does not produce income, it is not an investment. Remember my rule about that.It must produce income or it is only a speculation, gold, silver, platinum, palladium, raw land, properties in Belize, theseproperties in Costa Rica, whatever the heck it is, these proper-ties do not produce income.We are not about investing in real estate.We are about investing in income property.Note the distinction in the language. It’s called income property,because it produces income, it’s not speculative. You buy it on a cash flow basis. And remember, our Meet the Masters of Incom-ecoming up. The theme is revenge of the cash flow investor.And let me tell you something.This past few years or this financial crisis, the cash flowinvestor has won the day for at least, at the very least, they’ve been in a sustainable position where they can weather the storm, so you got to invest for cash flow.
Two more things before our guest here.I got a commercial property in my email box. This one from the well-known company, Marcus and Millichap, and Marcus and Millichap set up this property, and this thing looks like a to-tal piece of crap okay?Not that I have an opinion about this or anything. And so it says Mucus and Millichap is pleased to offer the following, exclu-sive limited investment property opportunity, a single tenant office building in Little Rock, Arkansas. Now, this is an office building that looks like a house, okay?There area lot of properties like this around the country that are just like basically little houses that happen to zoned commercial, so they’re”office building”. It’s not the steel and glass, beautiful modern high rise building and I think of it as an office building or even a garden style.This is a crummy little one-story, basically a house that is zoned office, it looks like okay?Now here is what it says and I just want – this is educa-tional,because look at how crappy this deal is right? A single-tenant office building, it’s 7544 square feet, Little Rock, Arkansas, the prize is $1,425,000.
Now,yourfirst thing you should do is just without yourcalculator and say what’s the cost per square foot? Is it below the cost of the construction? Is it at par with the cost of the construction?Or is it way above the cost of con-struction, which is the case here.Remember, we’ve got a 7544 square foot, and you know, I just noticed this.They don’t say that’s the building that could be the lot size.Itjust says size, hmmm size of what?The loft or the building? I’m assuming it’s the building. If it’s the size of the lot,this deal is much worse than I thought okay?But you are just doing the division here. 7500 square feet, you know, you take 1.4, 1,425,000 and divide, that’s $189 per square foot for a little crummy house-type structure. You could build that for probably $90 a square foot in Little Rock.And it says long term 18- year leaseguaranteedby United Mexican States. I don’t know what that is. It must be some kind of company or maybe it’s a charitable organization, I don’t know.So this, you got one tenant in there and if that tenant defaults, you are out of business. You got annual CPI rent increases, in other words, the rent increases are indexed to the consumer prize index, which we all know because we listen to the show, woefully underestimates the true rate of inflation. So you are going to get burned there.It’s located directly across from the main entrance to theUniversity of Arkansas, Little Rock.Well that’s probably good, okay. There is the deal. I wouldn’t touch that with a 10 foot pole. And oh, I didn’t even mention the cap rate. The cap rate on this deal, listen to how crummy this is. You go to jasonhartman.com, you look at the cap rates of our properties and you’reprobably not going to see anything be-low 8.5%. You’ll see a bunch of cap rates in the 10% range, the 12% range, some even better than that. This cap rate, 6.59%. Folks, people buy that kind of stuff every single day.Why, why do they do it?You got me. I guess they’re just too sophisticated to know any better.
Okay, last thing before we get to our guest, Ben Bernanke. You’ve proba-bly seen this things floating around on the social media.There is a bunch of them out there. They all have the same format. It’s pretty cute, it’s like a poster. And this is from Silver Circle, silvercirclemovie.com. I don’t know what that is. But they are probably selling precious metals. That’s probably what it is. But it’s a funny sort of collage about Ben Bernanke and it’s got six pictures on it and it says, you know,the first picture is what congress things I do, and it’s got a picture of Ben Bernanke walking a tight rope. In other words, he’s trying to balance the economy out and make sure that the stock market is okay,and the money supply is okay, and employment is good, and inflation is in check, what a bogus thing that is.He doesn’t do it at all. No central bank does. The next cell says what Keynesianeconomists think I do, and there is a picture of Mr. SpockfromStar Trek, the very logical Mr. Spock who evaluates everything, is very prudent and careful.And buy the way, the Keynesian economist think, you know,remember John Maynard Keynes, his philosophy was prime the pump right? Put a bunch of fake money into the money supply. I’m not a Keynesian at all, okay? I think Keynesianism is a bad thing generally. And then, the next cell says what Austrian economist think I do, and there is a picture of Ben and there is a bunch of dollar bills floating around his head and he’s smiling. And the Austrian economist of course, they are unlike the Keynesians, they are your diametrically oppose the Keynesians. You know, I agree with the Austrian school.And what they think is they think the government should get out of the way free market should rule the day okay? The next cell says, what I tell people I do, and there is a picture of Ben and he is captaining a ship and he’s got his captain’s hat on and he is going off into the sunset, and like the brave man he is whose taking care of the economy and he’s got all our best inter-ests at heart. Okay, that’s what he tells people. He does. And then, the next picture is what I actually do, and there’s a picture of Ben flipping a coin be-cause his guess is about as good as anybody’s. And if you listento that arti-cle thatI shared on the last show,episodenumber 242, it’s really telling about that transcript at a privateFederal Reserve meeting that was released. They talked about how completelyidiotic this people are. They really know noth-ing. Their guess is as good as ours and that’s why they should justminimize their level of inference, and let the market correct itself. That would be the best thing.And the last image says how history willremember me, and there is picture of the Hindenburg blimp crashing into the docking tower and it has got a huge picture of the dollar bill on the side as it’s going up in flames, and that is how history will remember Ben Bernankeand Alan Greenspan.In my opinion,I agree with that.They are the people who destroyed the value of the dollar.
But as a prudentincome property investor, you know that as the dollar is de-stroyed, so as the value of your mortgages be de-stroyed.Remember,inflationattacks our savings, our stock portfolios, our mutual funds, our bonds, even our equity in real estate. But thankfully, it al-so attacks our debt. So it destroys the wealth of all the people who did this supposedly right thing who saved money, who paid off their home, who did all of that stuff, those people get hurt the most,while the people who have long term fix rate investment grade debt outsource to somebodyelse called the tenant, and attach to a package of commodities that are not indexed to the dollar because they are traded globally,and those are the construction material, the ingredients of a house, the ingredients of apartment building, those are indexed to inflation, those people win the game on every single level and that’s what we do as prudentincomeproperty investors and that’s what we talk about here on the Creating Wealth Show.
So, lets go to today’s guest, joining us forMeet the Masters in March, that would be next month, it’scoming right up fast folks.Get in on the early bird prizing, go to jasohartman.com to register.Also while you are there, look at the properties and the blog on our website,a lot of great stuff there and we look forward to seeing you atMeet the Masters in March and we will back with today’s very very interesting guest in just a moment.
Female: Jason provides an extremely unique service, deal evaluator. Are you inter-ested in the property outside of our network, need a second opinion? No problem.Let our experts evaluate the deal.Find out more about it at jason-hartman.com.
Jason: My pleasure to welcome William Cohan to the show. He is the author of several books including House of Cards:A Tale of Hubris and Wretched Ex-cesses on Wall Street. William how are you?
William Cohan: I’m very well. Thank you for having me.
Jason Hartman: Good.Thanks for joining us. So, you are coming to us today from New York and you are right in the thick of it there When we talk about AHouse of Cards, give as someinsights as to what you cover in the book and what’s going on Wall Street in general maybe?
William Cohan: Well, I think, one has to of course reflect a little bit of – Nothing comes to us sprung full born,everything has a history and decadence. And on Wall Street was a series of private partnerships that have been around for some-thing like 200 plus years and to one by onebeginning in 197. They all started going public and substituting other people’s money in their capital structures for the money that was originally supplied by their partners. So for the first say 200 years of Wall Street’sexistence, it was a series of small underfunded private partnerships and the American public had very little interaction with them and basically knew very little bit about them.Beginning in the 1970’s, I mentioned this one firm called Donaldson, Lufkin, and Jenrette, which was a New York private partnership decided it was going to go public. OtherWall Street firms were aghast and offended.It was against the New York stock exchange rules. But they persisted and went public, and then of course one by one, everybody else on Wall Street went public too.
So overtime, what had been partners of money that was being risked every day and therefore forced everyone at these small firms to be prudent about the risk they were taking,went from being a sort of a partnership culture to what I call a bonus culture where people were encouraged to take risks with others people’s money.Their own net worth wasn’t on the line anymore. They had no accountability whatsoever, and as a result, they were encour-aged to take huge risks with theirinvestors and their creditors’ money. And as a result overtime, they took more and more risks, they used more and mo-releverage, they essentially became, hence the title of the book, ahouse of cards. And every firm on Wall Streetwas pretty much like this. Bear Stearns was just the first to fail in March of 2008.
Jason Hartman: And when you talk about these firms going public and so forth, are you talk-ing about investment banks specifically or just general financial services firms that serve consumers like Merrill Lynch for example or?
William Cohan: Basically, I’m trying to make a subtledistinction between securities firms and commercial banks, although now since the collapse, the ending of the Glass-Steagall Act, so you have to go back to the depression and the creation of what was called the Glass-Steagall Act in around 1934, which forced investment banks, securities firms like Goldman Sachs and Morgan Stanley. In fat, that’s how Morgan Stanley got created because to separate from commercialbanks. So JP Morgan, the great JP Morgan used to have both commercial banking and investment banking in under one roof but the Glass-Steagall Act required that they separate commercial banking from in-vestment banking because investment banking was perceived as being very risky, business where people were encouraged to take risks, and commercial banking of course had depositor’smoney and so they did not want to put that money at risk, and that’s what peopleexperiencedduring the great depression when so much money was lost because of bank deposits that they couldn’t get out and people lost a lot of money, so they wanted to separate commercial banking from investment banking. That is how Morgan Stanley got created, because two departments from JP Morgan started an investment banking from called Morgan Stanley.And Goldman Sachsstayed as an investment bank.It didn’t really have a commercial banking operation and other firms chose which way they were going to go. So, it wasn’t until 1999 when Glass-Steagall was repealed, that investment banks and commercial banks could be in the some business again.
So now, you know, by the time this crisis whirls around in 2007 and 2008, it’s very hard to distinguish between a commercial bank and an investment bank and a securities firm and a non-securities firm, but the fact of the mat-ter was, it hadn’t been – the US government had never saved a securities firm until it decided to step in and save BearStearns. In the past, this has always led securities firms into trouble fail as opposed to commercial banks that got into trouble. They were rescued. But now you got you’ve got, so you had asystem where it was hard to tell onefromother. They were all interconnected and they were all too important, and you know, the failure, the risk of their failure was too great and so we had to save them.
Jason Hartman: And I mean, during the financial crises, it took the question as which one but the most recent one,theseinvestment banks on Wall Street werebecoming bank holding companies right? Wasthat so they could receive bailout funds from –
William Cohan: No, not really. So in part it was, yes. So in September – I think it was Sep-tember 22, 2008, the two sort ofremaining big securities firms, Goldman Sachs andMorgan Stanley – When I say remaining, I say that sort of tongue and cheek in the sense that obviously Bear Stearns hadfailed in March, Lehman Brothers had gone into bankruptcy on September 15, a week earlier, and also a few days before September 22nd, Merrill Lynch which was going to go out of business and fail was bought by Bank of America.So there used to be five big securities firms in by September 22nd of 2008, Bear Stearns, Merrill Lynch, and Lehman Brothers had all failed, leavingMorgan Stanley which was about to fail and Goldman Sachs which was not far behind.
So what they did is they appealed to the Fed to allow them to become “bank holding companies” which gave them basically infinite access to the federal funds at a very low cost and was basically a gift, an underappreciated gift from the American public to these two firms allowing to have all the liquidi-ty they needed to fund their business and to survive. But they became bank holding companies and in that, they joined the other big banks likeBank of America and JP Morgan and DeutschBank and things like that who were al-so bank holding companies. So therefore, what happened was on September 22, 2008 is basically securities firms, the big securities firms all went away and they became bank holding companies which has given Goldman Sachs and Morgan Stanley like this other banksinfiniteaccess to low-cost funds from the Federal ReserveBank, which has been a gift from the Federal Re-serveBank to these funds because thenthey can turn around and invest this money in treasurysecurities and take the spread or they can lend it out and get an even bigger spread.
So, it’s an incredible gift that the fed keeps giving to these firms and at the expense I might add of theAmerican public who not only helps pay for it, but also whoseinterest rates that they get on their savings arekept incredibly low and now that we become a nation of savers again, savers are being panelized for saving. I mean I don’t know when is the last time you look at your savingsaccount –
Jason Hartman: Soit’s below the rate of inflation, so certainly, we are getting panelized for saving.
William Cohan: Exactly.
Jason Hartman: Yeah. Saving money is about the worst deal going unfortunatelywhich this event incentivizes bad behavior in the economy and of course very specula-tive behavior, and I don’t think that’s good overall. But you know, you have some very interesting chapter titles in your book.One is a section, rather than a chapter, where you talk about the end of the second gilded age and then, the tenant ten strategy. Tell us about some of that if you would.
William Cohan: Well I mean, I think that you know, itwas truly – Basically, it has been one big party for Wall Street since the early 1980’s when inflation was tamed by Paul Volcker. Reagan came to town and basically loosened the regulatory environment. There was a lot of financial innovation, whether it was the creation of securitization, which led to the creation of securitizing mortgages or auto loans, or credit card receivables, innovation of a high-yield finance which was Mike Milken and Drexel Burnham who created the so-called junk bonds and sort of, you know, Wall Street’s animal spirits got unleashed if you will, and that has led to the combination of that with this other fact of life on Wall Street thatI mentioned before which was that these were no longer private partnerships by the mid-80’s. All the, firms except for
Goldman Sachs, have gone public. Goldman Sachs didn’t go public until 1999. But basically, all of these firms were encouraged, the people of these firms were encouraged to make big bets with other people’s money.
So you hard this one big party. I mean whether it was theleverage buy house or internet IPO’s, oremerging telecom you know, stereo ormortgage-bank security hysteria. I mean, on and on and on, I mean it’s been one crisis after another that was created by this combination of the fact that people got rewarded to take risks with other people’s money, all these new kinds ofproducts were being developed and brought into the market without any accountability on people’s behavior because there was no threat of los-ingyour entire net worth, because they weren’t privatepartnerships anymore. In fact, people were encouraged to take these risks because they wanted to get big bonuses and the way to get a big bonus was to generate revenue, and the way to generate revenue was to sell these wacko products to unsuspect-ing buyers. So –
Jason Hartman: And they may not came home to roostering your tenure so, you know you can’t just like our politicians just kick the can down the roadto the next group.
William Cohan: And even if they do came home to rooster on their tenure like they did in 2007 and 2008, what happens, there’s no accountability. They get bailed out and they still get their big bonuses.
Jason Hartman: You see, it’sjustdigesting and you can really see why people are so angry about it, which actually brings me to anotherquestion, just get your com-ments. This is not in the book obviously or anything but the OccupyWall Street movement, your thoughts?
William Cohan: Well, I’ll be honest with you.This is something that I have been wrestling with lately. I have written a few columns about it lately. I was on the Daily Show on April 28th, talkingabout my Goldman book and during that show, I talked about how I couldn’tbelievethat there was nobody out in the streets protesting about what Wall Street has been doing.
Jason Hartman: And here they are.
William Cohan: And so here they are.But I guess I amsaddened and disappointed with what here we are means.I wish these protesters,whoever they are, and they are re-ally are a proud section of America and Iapplaud protesting. Ibelieve it’s an important part of America and what makes America great or what has made America great, and so I’m all for it but I’m really kind of disappointed that-whoever these people are,they haven’t whatever taken the time or asked people like me who understand these things or other people to share with them the wayWall Street really works so that they can be clear in the chang-es that need to take place, so that we don’t have this recurring boom bust cy-cle on Wall Street that’srecurringseries of crisis that really are extremelyde-bilitating to not only our economy but to our entire culture and society. And so just sort of blithering away with the usual, you know, revolutionary pabu-lum which you often see now down at the occupy Wall Street movement. Ifind itvery frustrating anddisappointing I wish they were more focused and had a better understanding of the way Wall Street really works so we could get real reform.So I’m all for the protest, was an early person wondering why people haven’t protested but now I feel like there is no there there and I’m not quite sure what it’s all about.
Jason Hartman: Yeah, it just seems that they need to get clear on a real message and other-wise, they’re just sort of being rather childish. But another interesting point and this has been circulating around Facebook and then the social media where there are two newspaper clippings. And one is entitled ex-mortgage CEO sentenced to prison for a 3-billion dollar fraud and it talks about how he got a forty-month sentence and the other article says homeless man gets 15 years for stealing $100. The contrast here is mind bugling and it is just amazing how little account therehas been at least so farfor the crimes that have gone on in our financial system at the highest levels.
William Cohan: I know exactly what you are saying. As I wrote in the Goldman book, the crime is not what’sillegal, the crime is what’s legal.You have to remember that for decades now, generations now, Wall Street has been influencing what goes on in Washington,Wall Street has been paying lobbies and donat-ing to congressional coffersso that they can get the kind of regulations or lack thereof, that they feel comfortable with. There has been the revolving door between Wall Street and Washington that’s been going on for decades, so you get something like the Dodd-Frank law, which is 2200 pages long that nobody can figure out. While we are having this conversation now,Wall Street lobbyist are working away in Washington to make sure that the regulations that are still being written are ones that they can live with and they are willing to take out all the stops to make sure that that happens. As a result, you don’t get – It’s just shocking to me and I’m thinking house of cards, about Bear Stearns, I didn’t do this intentionally but I think it’s clear that there is a sort of prosecutorial road map that shows in documents and in conversations I had with people, you know, what was going on with the Bear Stearns hedge funds, which led to the collapse of Bear Stearns. The collapse of the hedge fundsled to the collapse of Bear Stearns and there was a trial. Actually, these two hedge fund managers were – The only time that anybody and all this has been brought to trial criminally, and then they were acquitted. They were acquittedbecause the government, you know, choose to go down on a prosecutorial path that totally miss the boat.
Jason Hartman: I mean how could the government mess that up. It seemslike it’s almost in-tentional, like there is a payoff. I hate to say I’m so conspiratorial but it’s funny. I mean, like another case that just bugs a heck out of me is the Bernie Madoff case.There was no trial. I mean, he just pled guilty and that was it. Italmost seemed like that was to cover things up, so we wouldn’t hear about them and evidence wouldn’t be made public. I don’t know.That all just hap-pened far too smoothly for me I thought.
William Cohan: Well of course, everybody who is chargedwith a crime does have the option of pleading guilty and avoiding trial, and so he clearly decided to go that roof for whatever reasons, you know I don’t know.On the other side, you have somebody like you know Roger Rothman, the hedge fund manager who decided to plead not guilty and so we had, you know, a theater of the absurd, you know, as his trial progressed and he tried to defend himself but it was clear that he was caught red handed. And so, I guess, you know, you can’t always – This is one of the rights that people who are charged with crimes have is to plead guilty. I mean, I guess it’s not just similar to the way some people in Libya feel when they see that Gaddafi has been killed and-some people would have preferred that he had been captured and put on trial and put away in prison for the rest of his life so he really continued to suffer,
Jason Hartman: Let me take a brief pause.We’ll be back in just a minute.
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And so what is your thought about the future?You know,Wall Street had its big changes in the 80’s and it’s interesting because that’s shortly after that is when it seems to me that the stock market just expanded so much into mid-dle America,owning stocks later with theadvent of the internet and the online trading. It seems like everybody in the brother got into the stock market whereas in the old days, it was more for the wealthy and the insiders. And I don’t mean insiders like insider trading but just the people at higher levels of finance. But the stock market become really really public after the big changes and maybe that’s what caused even more pain into the Ameri-can middle class.
William Cohan: Of course, it wasn’t by accident, right? I mean Merrill Lynch is now apubliccompany. It’s got a real report quarterly profit growth all the time. So you know, it is the biggest broker.It’s a global brand name. And so what does it do?It pushes relentlessly throughits advertising, encouraging people to own stocks and of course that serves them well because they get fees eve-ry time they do a trade or open a brokerage account. And so, it just became a national and international industry to encourage people to own stocks and so you’re absolutely right and like when the market crashed in 1987, 24 years ago today, you know, yesterday, two days ago, you know you had the market going down 22.6% in one day and the little investor got totally screwed. I mean, just completely taken advantage and lost a lot of money.
You know basically, ever since then, it’s been a complete and utter lost of trust between Wall Street and main street but a think that, you know,with a slow economy does a tremendousamount of damage to Wall Street firms. I mean they don’t, they can’t – It’s much harder for them to make money in this slow economy and you see that in their results that came out in the third quarter.I think that you combine that, the slow economy and peoplebeing, you know, shying away from risk taking with, you know, the Dodd-Frank law, the Vocker rule and the new regulations being written even though we’re not quite sure how it’s all going to came out, but basically, you know, the casino used to operate as we talked about for the lust generation on Wall Street, is clearly in the process off being, if not close, then certainly its hours are being greatly demised.
And so a firm like GoldmanSachs, which prided itself from having the best trading operation which could be also be the best “gambling operation”, thatgambling apparatus to a large degree I think is going to be much tougher in the future and people like Goldman and all the rest of Wall Streetwhich prided itself on making these proprietary bedsand making a lot of money from them are not going to be able to do it anymore.
So I think, either intentionally or not, I think that what is likely to happen in the future is these Wall Street firmsarenot going to make as much money as they used to make.Hopefully, they will then not pay their people as much as they’ve being paying thembecause they get way overpaid and thirdly, I sus-pect that they will go back to being what they used to be when the Glass-Steagall Act was in effect, where they provided the services we want them to provide, which is capital to companies around the globe whenever they need it 24/7,you know, whether that’s debt financing or equity financing, providing investment advice, providing advice on mergers and acquisitions but you know, closing the casino and I think that will make the world safer for all of as cause we just can’t tolerate this kind of risk taking anymore that Wall Street has being doing for the last 25 years.
Jason Hartman: Well, I very much hope you are right, however,mypessimistic side says that Americans have very short memories and when the frenzy starts again which shouldundoubtedly will,Wall Street will have theirlawyers, lobbyist, PR firms, and spin doctors and all of it out in mass, and the general public will just soak it up like theponds or suckers they are. I don’t know I’m pretty pessimistic I guess.
William Cohan: Well, I think you know, again it remains to be seen. I mean we’ve been-taught a lesson here. There is no question about it butyou are right.We have been taught this lesson many times in the last 25 years, 10 times at least.And, you know, when the market crashed in1987, I saw grown men standing around cultural machines cryingand everybody swore this kindof thing would never happen again, and then it has only happened about 10 times since. So certainly, nothing in the Dodd-Frank Law or any of the reg-ulations that are being written is going change the way people behave on Wall Street or the change theincentives on Wall Street, so I suspect before long we will have another problem.
Jason Hartman: Yeah. And what do we do, just in closing here, you know, I mean what do people need to do built or what needs to happen I guess in government to fix it?Do we need to change Glass-Steagallback to the way it was before ’99 . What would solve the problem?
William Cohan: Well, I think while, you know, reinstating Glass-Steagallor something like that and separating commercial banking from investment banking, separating risk takers from non-risk takers I think would have to be updated obviously, I think it would be a very effective rule or law. I thinkgetting it implanted is very tough in this political stalemate environment. You know, I would call on this Wall Street firms.They can do this without a law. They need change the incentivesystem on Wall Street.It can no longer be right that people get paid to take huge risks with others people’s money and they get paid big bonuses, whether they you know, lose money for these firms or don’t loss money for these firms
One thing that was a common denominator through, you know, much of the years until 1970 which was that these firms had to operate using theirpart-ner’s capital and as a result, they were much more prudent about the risks they were willing to take and they weren’t rewardedto take risks, they were rewarded to create pre-tax income so that they would have something to di-vide at the end of the year. So we need to go back to something like that. I made a few proposals that you know, never of course get any traction but I think that this is something that real leaders on Wall Street.You know if Lloyd Blank find that Goldman Sachs were areal leader, he would imple-ment a program that put, you know, the top 100 people at his firm or the top 300 or 400 have real skin in the game, have their entire net worth again on the line, so that they are really cognizingevery day about the risk they were taking and are really prudent about the risk they were taking.
And I think if something like that would help even when we don’t get the legislation pass, that might really do it but that kind of self-regulation, that kind of leadership would help reduce the tensions and the risk that Wall Street possess to the rest of us, and it’s long overdue and that’s the kind of thing that I think needs to happen.
Jason Hartman: And I couldn’t agree more but the question is you look where the incentive lies. Why would they do that? Why would Blank find are. I mean playing with others people’s money and taking big risks that’s rewarding to Gold-man Sachs. It’s rewarding to all of other firms too, isn’t it? I mean your vi-sion is a good long term vision. It seems likeit would inspire public trust and more money ultimately would come back to the market. I agree with you there but –
William Cohan: Goldman used to pride itself on being long term greedy. What better way on be long term greedy than to try to take a quantumly forward in trying torestore the trust that has obviously been lost between Wall Street and the American public, clearly been lost. And one way to do that is to try to instill into the American public some level of confidence that hey, we have our own network on the line again and we are the first ones that we are going to get wiped out if we do things that are stupid or not in our own interest that really damage the American public and the world economy, and that will make them more prudent and I think change the kinds of risk they are will-ing to take. And the great thing ison Wall Street is basically a cartel at this point.And so if one firm like Goldman Sachs does it, they will all do rela-tively quickly, and we will all be safer as a result because counting on con-gress to come up with laws that make sense and to change people’s behavior it is a long put on itself too.
Jason Hartman: Sure it is, sure it is. And you talked about it at the investment bank level and the Wall Street firm level. But at the corporatelevel, the companies that people are actually buying the shares in more broadly than the investment banks, wasn’t Sarbanes-Oxley supposed to solve that problem? I mean did it help even or things just sort of business as usual with a lot more accounting fees than before?
William Cohan: Well, there are a lot more accounting fees than before. I mean, you know, I don’t whether Sarbanes-Oxleyis worked or not but it’s harder to come up with clearexamples of sort of end run, world come, typo kind of horrific corporate behavior. Again this time, it was confinedlargely to the financial sector. This was in crisis of Wall Street’s own making that was entirely preventable but they couldn’t. It’s like theparable of the frog and the scor-pion, you know why the scorpion sting, why does Wall Street do this be-causeunfortunately, that is what they are incented to do now.
Jason Hartman: That’s theirnature right?
William Cohan: That’s’ their nature, exactly right.
Jason Hartman: Well, very very interesting stuff. I sure hope that your vision pans out. I’m lessoptimistic but if you’re vision pans out, I think everybody would be bet-ter of for it and I think Wall Street really needs to just drain in their greed a bit and set a good example. I sure hope that happens someday because I think it would inspire a lot of confidence.
William Cohan: And if doesn’t happen, then I’ll haveanother book I’m sure to write about, the latest crazy behavior on Wall Street.
Jason Hartman: That’s for sure. Well William Cohan, author of the House of Cards and severalother books, The Tale of Hubris and Wretched Excess on Wall Street. Thank you so much Bill for joining as today. The book is getting great reviews on Amazon. It looks very popular.Did you want to give outany other websites or any other information about where people can get them?
William Cohan: They can get them on Amazon. If there are any bookstores in existence an-ymore, I think they still have them. They are paperback versions. I’m sure Amazon sells them for 2 cents each. So the more importantthing is that people get a hold of them and read them and understand the wayWall Street really works so that they can put pressure on people, you know, congres-sional leaders and peopleon Wall Street to change the way they have been behaving.
Jason Hartman: Fantastic.William Cohan, thank you so much for joining us today.
William Cohan: Thank you.Thank you for having me.
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The Jason Hartman Team
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