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DEREGULATION REDUX 

in , on the eve of the financial crisis. The largest firms became considerably
larger. JP Morgan’s assets increased from  billion in  to . trillion in
, a compound annual growth rate of . Bank of America and Citigroup grew
by  and  a year, respectively, with Citigroup reaching . trillion in assets in
 (down from . trillion in ) and Bank of America . trillion. The in-
vestment banks also grew significantly from  to , often much faster than
commercial banks. Goldman’s assets grew from  billion in  to . trillion
by , an annual growth rate of . At Lehman, assets rose from  billion to
 billion, or . 
Fannie and Freddie grew quickly, too. Fannie’s assets and guaranteed mortgages
increased from . trillion in  to . trillion in , or  annually. At Fred-
die, they increased from  trillion to . trillion, or  a year. 
As they grew, many financial firms added lots of leverage. That meant potentially
higher returns for shareholders, and more money for compensation. Increasing
leverage also meant less capital to absorb losses.
Fannie and Freddie were the most leveraged. The law set the government-
sponsored enterprises’ minimum capital requirement at . of assets plus . of
the mortgage-backed securities they guaranteed. So they could borrow more than
 for each dollar of capital used to guarantee mortgage-backed securities. If they
wanted to own the securities, they could borrow  for each dollar of capital. Com-
bined, Fannie and Freddie owned or guaranteed . trillion of mortgage-related as-
sets at the end of  against just . billion of capital, a ratio of :.
From  to , large banks and thrifts generally had  to  in assets for
each dollar of capital, for leverage ratios between : and :. For some banks,
leverage remained roughly constant. JP Morgan’s reported leverage was between :
and :. Wells Fargo’s generally ranged between : and :. Other banks upped
their leverage. Bank of America’s rose from : in  to : in . Citigroup’s
increased from : to :, then shot up to : by the end of , when Citi
brought off-balance sheet assets onto the balance sheet. More than other banks, Citi-
group held assets off of its balance sheet, in part to hold down capital requirements.
In , even after bringing  billion worth of assets on balance sheet, substantial
assets remained off. If those had been included, leverage in  would have been
:, or about  higher. In comparison, at Wells Fargo and Bank of America, in-
cluding off-balance-sheet assets would have raised the  leverage ratios  and
, respectively. 
Because investment banks were not subject to the same capital requirements as
commercial and retail banks, they were given greater latitude to rely on their internal
risk models in determining capital requirements, and they reported higher leverage.
At Goldman Sachs, leverage increased from : in  to : in . Morgan
Stanley and Lehman increased about  and , respectively, and both reached
: by the end of . Several investment banks artificially lowered leverage ratios

by selling assets right before the reporting period and subsequently buying them back.
As the investment banks grew, their business models changed. Traditionally, in-
vestment banks advised and underwrote equity and debt for corporations, financial