In part because of the Basel capital standards, which required banks to hold far less capital for a given volume of whole mortgages than for an equal volume of mortgage-backed securities, Wall Street banks were far more inclined to hold mortgage-backed securities rather than whole loans.

Huh? Shouldn’t the conclusion be the opposite, i.e. shouldn’t banks want to require to hold less capital rather than more? What they need to hold they cannot loan out and make profits with. This is why they have railed against Basel III, when the capital holding requirements were upped.