Fed Acts to Rescue Financial Markets – New York Times
But of course, these banks are "so big […] we can’t afford for them to fail." The loss of capital, savings, and jobs would be too big a hit. And yeah, they are right. Americans cannot afford to have major parts of the economy evaporate.
So here’s the story so far (and how I understand it, dumb as I am, still I am learning, and so should you): Millions of mortgages were given out to people who — as the old rules said — could not have gotten a loan, because their incomes were just not stable enough to handle it.
But the new rules claimed, "Go ahead and give them a loan. We’ve thought of a way to spread out the risk, so that no one takes too bad a hit. We shall plan on having a certain number of losses, and just take "loan debt" as a single package deal."
But see, the whole thing depends on whether there are more good loans than bad, so that the losses will be covered by the gains.
The problem was when too many of the subprime loans went into default, and a cascading failure occured, because the fractional reserve banking system relies on just enough people paying their debts for lenders to remain solvent.
And once the losses became this big as they are now, they found that there isn’t enough money on hand even to make the prime loans happen at all.