The Financial Crisis

One reason for the lightning fast demise of the remaining investment banks was due to a relatively simple concept -- the "snowball effect." The value of an investment bank's stock is tied very tightly to the value of its "products" -- basically, its debt. That is, when the stock price declines, paying off debt becomes more difficult for the bank. Thus, credit ratings decline, and the stock goes down further. Soon, credit ratings decline again and the stock goes down even further, and on and on. This isn't true for, say, an ice cream shop. The price a customer is willing to pay for an ice cream cone is completely unrelated to the ice cream shop's market valuation. I suppose the above is true for any bank. But the extreme leverage these companies were operating with - 30 to 1, in some cases - made these stocks very risky investments.