“In 2007, many analysts dismissed the significance of subprime mortgage losses, which they compared to a bad day in the stock market. In a report that November, Hatzius called the analogy flawed. Citing research by the economists Tobias Adrian and Hyun Song Shin, he noted that stocks were mostly owned by ‘long-only’ investors such as pension funds who ‘passively accept a hit to their net worth.’

By contrast, mortgages are owned by leveraged institutions such as banks, investment dealers, hedge funds, Fannie Mae and Freddie Mac. For every dollar of losses, these investors would have to shrink their balance sheets to preserve their capital ratios. This was a key reason Hatzius projected weaker growth and a higher risk of recession in 2008 than the consensus.”