Chris Haroun explains how mortgage-backed securities were bundled into products that looked safe, letting firms borrow $9 for every $1 they invested. When asset values fell, that leverage turned small losses into catastrophic ones.
These are essentially just mortgages. So that has allowed us to push the leverage considerably beyond what you might be willing or allowed to do in any other circumstance, thereby pushing the risk profile without raising any red flags.
He starts explaining that the troublesome assets actually are mortgages. And here many mortgages were bundled together into investments. And because those assets seemed very safe, the firm took on huge leverage against them. And leverage means borrowing money to invest more. It's like investing $1 of your money and borrowing $9 more to buy something worth 10 bucks. It's great when prices rise, but it's terrible when they fall. And he's implying that we piled on debt because we thought these mortgage assets could not fail, and they pushed leverage beyond normal limits.
