I'm glad that all answered the OP post....
Let me give you my feeble attempt...
ALL financial institutions (and even governments) operate on leverage..
So, a BS might have only 7% equity to support their whole company...
They buy money from others... and a lot of that is in short term paper... I bet a huge percent is overnight money...
SO, you are a bank or insurance company or pension plan with some money that you need to invest overnight... and you hear that BS is having a liquidity problem... so you decide that it would be better to sell your overnight money that you have been selling to BS for years to GE tonight...
Well, BS now is in a bind and does not have enough money to balance their portfolio... so they offer a higher rate to attract money... well, then company B is like... why are they offering so much to buy my money? Are they having problems
So, company B sells to Exxon... and now BS is scrambling to get their overnight money.... and then their weekly paper starts to disappear... and the people with longer paper is trying to sell ASAP.... and then BS is toxic....
This can happen very quickly.... the 'bank run' as it were...
And there is not a bank in the world who actually could withstand a significant bank run... they are not designed to handle one...
So over the next 28 days, BS is going to be selling a lot of their investments to reduce their cash needs... but selling into a dropping market... which reduces their capital which means they sell more... etc. etc... and this then makes others have to sell because THEY are showing losses they can not handle...
As one talking head said.... someone will be picking up BS on the cheap in 28 days.... maybe JPMorgan as they are lending the money (well, at least the middle man as the FED is actually doing the lending)...
Now.. using my example above... what if they don't even want to sell to Exxon or GE... only buy treasuries... then the price of treasuries goes up, the interest rate goes down on them, but people 'feel' better... they are 'safe'....
A good explanation