How did the stock market crash cause US banks to fail?

Answer 1

I am no expert, so take this from whence it comes.

Stocks make income percentages over time larger than those made from loans used to buy stocks (or did). Many people were borrowing money on the equity on their assets, like houses, businesses, and other assets. They invested them in stocks, and watched the prices. When the prices rose high enough to make a sufficient profit, the stocks were sold to pay off the loan and the remains were used for reinvestment, or to pay off other obligations.

People were doing this cycle, and thinking everything was sweet ... until either the banks decided they had too many risky loans (forcing a stock sell-off), or when the "Big Guns" decided the Stock Market was "over-valued", and sold off their stocks to make the big profits (making the stock equity ashes, forcing a calling in of the loans), and to Hades with those who were caught in the smash.

The banks cutoff the loans (demand repayment) and people had to sell off their stocks for less than they anticipated (collapsing the stock price), some small but manageable loss, or have to "liquidate" their assets (lose the house, car, businesses, other assets).

When those who own millions of shares each of stocks decide that they want to assert more control on a company, they sell of masses of stocks, dropping the price, bringing about a larger sell-off that people have smaller gains or losses sell of to reduce losses. Then at the lower prices, these same "Big Guns" buy up more stocks at a lower price, keeping control of the company in a smaller number of hands. Anyone who borrowed to buy these stocks got stuck. When the loans came due, they had nothing.

Then there were the people who were conned into the "interest only, no-down" (commoditized loan obligations, credit default swaps) loans, who were caught when the banks wanted to "liquidate their debt load". When the stocks crashed, and the property values that were inflated to make the loans possible were found out. stocks (from the "commoditized debt obligations (borrowed from stock equity)) crashed even more, since the stocks had to be sold to fulfill these obligations.

It was a collapse from all sides, and anyone who was smart when they bought their home kept the equity maintained their old, albeit higher rate loans, and kept their home. Those who were conned into borrowing for the sweet items and the low interest rates on "owned" property got burned.

When people did not have the money to buy, the warehouses filled up and companies had to lay workers off, who were producing at 40 times what they were producing only ten years ago, but not seeing incomes rise to accompany the profits they were generating. (And more stock prices dropped.) But the owners and the banks who profited from the (visually if not liquid) increased assets, continued to give themselves (and within a Board of Directors with their proxy-votes each other), bonuses that were more than the total amount of the debts their companies incurred.

It was a mess all around, and the laws that at one time protected against these activities over time (starting about 30years ago or so) were gutted. President Clinton (was forced/conned/blackmailed to) sign the repeal of the Glass-Steagall Act, which opened the legal right to play these games. It took eleven years for it to all fall in on itself, and we can (sort of) see who wants to keep this from happening again, and who wants to return us to 1920. (We all know where we were within that ten year span!)