slurp said:
However, in a rare moment of semi-deep thought this question popped into my head ......... if all these banks and institutions are going tits up, who's making out? For a loss to occur there needs to be a gain somewhere else right? I want to know who's profiting from other people's misery so I can get in on the action!
Most of the answers have focused on why a bank's stock price may have fallen, but it does not answer your original question - why have the banks gone tits up, and who's making out? What is correct in the other explanations is that it is not a zero-sum game, and that just because banks have gone tits up (or lost) does not mean equal and traceable gains have been made elsewhere.
The banks got into trouble because they purchased Mortgage Backed Securities from other banks. Mortgage Backed Securities are a large bundle packages of individual mortgages (so Bank x gives out 10,000 mortgages and packages them all up into one security) that can now be sold as one unit, just like a unit of stock, or other securities. They have a specific price and a risk associated with them.
Mortgage Backed Securities were sold primarily to financial institutions from other financial institutions, and in some cases, those MBS's were bought on credit (the same way we use credit cards or lines of credit to make purchases). However, given the size of amount borrowed, should those assets fall in value, they would be in a lot of trouble. About a year ago when people started to default on their mortgages, and the real estate market in the US crashed, the Mortgage Backed Securities dropped drastically in value. So, in essence there were some very large banks holding some relatively worthless assets, and some banks, like the ones that went under paid for them with significant amounts of debt. Since banks are in the business of loaning money, an asset that cannot be converted into cash means that they do not have the cash available to loan-out money to people like you and me and other businesses that need it. Also, no one will loan the banks money because the mortgage backed securities they would use as collateral would not be very valuable. So the banks are stuck with a worthless asset, and no "product" (money) to sell to other people, and this means they can't make a profit (interest) - hence their demise.
The $750 Billion Bail-Out provided by Congress was an offer from the US Government to actually purchase these Mortgage Backed Securities from many banks, thus giving them the cash they need to loan-out again, so that the banks can continue to charge interest on it and earn profits.
So - what caused the banks to go tits-up? Buying assets that dropped drastically in value, and buying them with leverage. Who got the money - when the mortgages were created years ago, real estate developers who got paid in mortgage money from the banks and every day consumers who purchased houses from one another got the money. Who else got the money - as the mortgage backed securities were sold from one bank to another, each sale subsequently gave each selling bank more money (but these were commissions, not enough to cause a bank to go under). Who stands to profit - the US government has bought $750 Billion dollars worth of assets (Mortgage Backed Securities) that should go back-up in value (let the debate begin...). How could you have profited - be the US government buying low-value assets, or do what others have suggested - buy short stocks or put options on banks, knowing that what they held would be worthless - but the stock issue itself, and the decline in the stock market had nothing to do with the banks troubles.
