I read a lot of reports with some really, really high numbers of “Bitcoin” that Mt Gox either lost or had stolen but who can say whether they even existed? When a customer sent a money wire into Mt Gox that amount was entered into a MT Gox data base and the money was in the bank. If and/or when that customer decided to buy “Bitcoin” the Mt Gox software would only make an adjustment in their database and change the customer’s holdings from being denominated in currency to being denominated in Bitcoin. The money stayed in the bank..
When a customer sent Bitcoin into Mt Gox then Mt Gox would operate like their own bank and would have to store them.
The two storage mechanisms enabled them to have the potential to operate two separate fractional reserve accounts. It would seem they could be quite certain that neither account type would experience a total withdrawal run on the bank. They could have started to dip in to one account first, and could have flipped and dipped into the other. The Fractional Reserve Banking system traditionally keep a paltry 10% reserve.
The risk of operating two different currencies as fractional reserve systems is increased because buyers can suddenly decide to all exit the system using one or the other currency type thus doubling the reserves needed to be able to weather the storm. In a bad fiat bank run everyone would rush to remove currency and the bank would likely survive with 10% reserves. But in the Mt Gox, dual currency system everyone could make a run for either currency cauing that one to be exhausted and leaving the alternate reserve untouched. In such a situation the exchange would be forced to liquidate the alternate currency at fire sale prices.