This added to the fact that the Chinese banks have been instructed by the Chinese regulators to stop lending money to US banks means things wont look good right now in the US.  I know my mate who gets paid in USD will be rather grumpy about now.

That could mean really bad times for the US economy, they have been living on Chinese credit for the last few years.

Its not all the banks faults.
Interest rates had been too low, 1% in the US for years and 3% over here. The US government were putting pressure on the partially government run agency Fannie Mae (and later Freddie Mac) to provide mortgages to the masses, to do this they had to cleverly package the mortgages into bundles that could be re-sold. The big Ratings agencies (S&P, Moodys) then rated these bundles which were then sold onto the banks.
The banks and clients of the banks trusted the ratings of the rating companies (as the products were often so complex they could not be understood without in depth analysis).

Not really the banks faults. They were giving out mortgages to people who wanted them, given the current interest rates, under a government that wanted more people to own houses. The assets were then sold on based on their ratings that were too high.

Quote from: Dave

Theyre not borrowing anything - theyre selling assets to the govt (securitized debt) which is currently illiquid.

So they are selling debts to the government, that are quite likely uncollectable?  e.g.  The banks are selling the sh*tty debts that they saddled themselves with in the 1st place.  hardly secure are they at this point?  Selling the government debts that are quite likely to default, or are already defaulted?  or are the government not allowing them to do that, and only taking over "good" debt?

Imagine there are some factories where you could get some good meat and bad meat - if you wanted to take a risk you could buy the bad meat if you didnt you could buy the good meat. Now imagine that the factories started selling sausages mostly comprised of good meat but also containing a bit of bad meat - they rated these as being as good as the good meat as there was only a little bit of bad meat in them. Now imagine certain batches of the bad meat got a little bit too bad - suddenly people dont want the sausages as much any more and are panicking that the people they used to trade sausages with might have more bad meat than they are letting on. Despite the fact that there is still a heck of a lot of good meat out there because its all a bit mixed up no one really wants to trade in sausages.

The govt wants to buy the debt - no it isnt all likely to be uncollectable, that would be silly - there is actually a pretty good chance that the US govt will make some money out of the deal simply because they can sit on it all till the markets recover - remember these securitized loans are assets and theyd be picking them up pretty cheaply. The main point is that none of the banks know how badly affected the other banks are so no one wants to lend any money to each other - basically, if nothing is done, this could get very serious as credit becomes less available and banks are more reluctant to do business with each other well all suffer. Allowing banks to sell off these assets to the govt will reduce a lot of the uncertainty.