Update: Another piece of backstory, from a summary of this news story reporting an interview with former SEC official Lee Pickard (via):
The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms. You read that right -- the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.
Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1.
Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.
As Mr. Pickard points out that "The proof is in the pudding — three of the five broker-dealers have blown up."