The reason the bank themselves are collapsing is a little more complex.
Basically banks are required to have a certain amount of capital based on how much money they have lent.
The system is however tricky as that capital can take many forms.
It can be obligations, cash, pretty much anything you can give a market value to.
Most banks had complex obligations schemes as part of that capital , the famous subprimes packages ( basically it's kind of a fund of mortgages with a mix of good mortgage and subprimes mortgages, the idea being that by mixing the rate it pays is higher than by having only the best mortgages and the fact there are subprimses mortage is supposedly offset by the good ones so it shoudn't be an issue if a few mortgage default ( that's where the big mistake was made)).
Anyway suddenly some people started defaulting on their mortgages, and as the result the price of those mortage packages went down, the problem being that suddenly nobody wanted to buy them.
So their market value dropped a lot and it even became hard to guess how much they were worth due to noone buying them ( the funny thing is that most of those are still worth quite a lot but only if you keep them till expiration of the mortgage/obligations package).
Due to this suddenly the capital the banks had went down a lot and some started not to have enough capital to cover the outstanding loans they have out there...
In that case pretty much the only solution a bank has is to raise capital through a stock offering, problem is bank stocks went down the toilet due to the fact that banks had all those mortages that noone could give a value to and the market really doesn't like that...
Once those banks coudn't show the necessary capital, they were dead....
PS3-Xbox360 gap : 1.5 millions and going up in PS3 favor !
PS3-Wii gap : 20 millions and going down !
