> The reason that they were using MBS as money
> instead of Treasury bonds was because they had a higher rate of return.
That's the reason why a firm might hold the securities on its books in the first place. But it doesn't explain why another firm would accept those securities as collateral - i.e., as the guarantee of the value of its "money" - when traditionally that had only been done with near-perfectly liquid, near-zero-default risk Treasuries. Plus, the firm who accepts the securities as collateral usually doesn't get to keep the coupon payments, so doesn't enjoy the higher rate of return anyway.
SA