The New York Times has a great piece on the change in the "Net Capital Rule" in 2004 that allowed investment banks to leverage (borrow against assets) up to 40:1 (because before they could only leverage 12:1). This dramatic increase in leverage helped drive the demand for investment vehicles in financial markets, helping in turn to cause over valuation and the subsequent collapse. It also insured that once the market did collapse investment banks were so over extended that they were sure to go broke.
And guess who helped lobby for these changes? Why Henry Paulson, then CEO of Goldman Sachs! Excellent!
Jonathan Schwartz also points out here that Paulson testified before Congress in 2000 specifically lobbying for this rule change.
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