Why the Banks Are Failing Made Easy (kinda)

This is simplified and it is much more complex than this, but you’ll get the basic idea.

I’ll use AIG as an example.

People take out loans
Some banks give out loans to people who really can’t afford them

Banks sell these loans to other banks without telling them how bad they are.  Keep some for themselves.
People can’t pay loans.

Without enough people paying loans, banks that hold these loans can’t pay their own loans.

Yes, banks also give loans to each other.

Without the banks being able to pay their loans, yet more and larger banks can’t pay their loans.

Some banks that aren’t getting money from the loans they loaned out also INSURED those loans, so have to pay for loans that aren’t being paid with money from loans that aren’t being paid.

Not enough money is available to cover money not being paid back to cover expenses or in some cases insurance payouts.

Bank thus has no money and fails.
Other banks have to pick up the slack, which pushes some other banks over the edge which then fail.
Repeat until banking system comes into balance.

In the meantime, with loans not being paid, money is not available to loan out to other people, thus “credit crunch”.

Simple:  Think of pyramid.  If the banks and people at the bottom can’t hold up their end, the top comes tumbling down.  Until enough fall down to keep themselves up again, money news appears bad.