how the books bit back

MarketPipeline asks why banks sought to leverage so many mortgages: capital reserve arbitrage puffed the balance sheet.

  1. A bank with $4 billion in reserve could hold $100 billion in loans.
  2. But that same $4 billion could instead be used to invest in $250 billion worth of mortgage backed securities.

Another way of looking at this is that banks were basically making money—turning $100B into $250B—by flipping mortgages into securities.