(click on image for a larger version, all numbers are billions of dollars, expect the leverage ratio)
Take a look at Bear Stearns most recent balance sheet. The bank was running out of capital. Take a look at the "leverage ratio", which is simply total assets divided by shareholders equity. Between 2005 and 2007, this ratio increases from 27.1 to 33.5. This ratio tells us how much assets one dollar of capital generates.
The sudden increase in assets and liabilities between 2006 and 2007 must be due to the Bear Stearn's decision to take onto its books the two hedge funds that collapsed last summer. So it was the off balance sheet sub prime activities that brought the bank down. There is a hard lesson there for all investment banks as well as financial regulators - off balance sheet activities matter.
This week has seen two major financial failures. The first was Carlyle capital; the second was Bear Stearns. Ironically, Carlyle capital had a lower leverage ratio than Bear Stearns. So the subprime crisis started out with Bear Sterns bailing out two hedge funds, and ended up turning Bear Stearns into something that looked like a hedge fund.