for every dollar in capital, not deposits, they can lend 14. Thats 14 x 3% that they borrowed from the Fed at 0% or from depositors at <1%. Thats not anywhere near 7%. Thats 42%, less the cost of their borrowed funds. The banks that took write-offs and still pursued foreclosure etc and are now reaping the benefits of the real estate boom do not deserve any sympathy from me or you.
Don't get me wrong. I have no sympathy for the bankers. IMHO part of the BHO legacy is that none of the bankers, auditors, or rating agency personnel got to serve some serious jail sentences.
As for your calculations, they are true as long as the loans are all performing. But as we all know, there are always defaults there, and the banks don't always collect all the money owed to them. Of your hypothetical 42% gross profit, the bank has to cover its expenses (including bonuses) and shareholders will expect a dividend.
Now, what happens to loan losses? At first, the bank will keep on paying bonuses and dividends. If losses are too great, they will cut those. But remember that leverage works both ways. If a bank has $100 in capital, and made $1,400 in loans. Then if 7% of those loans need to be written off, that's a $98 write off, wiping away almost all of the capital.
