Originally Posted by Libertine

You don't seem to understand that debts are assets for creditors. You can value them as amount owed times the chance (on a 0-1 scale) they will be repaid. In your example, if the bank in question spreads risk across many companies, there's absolutely no problem.

The current problem was largely created by debts being traded with incorrect risk ratings, because they were restructured in ways that increased their rating yet did nothing to reduce risk. Basically, the artificially inflated ratings gave them an artificially inflated apparent value.

This caused financial institutions to be exposed to far higher risks than they could afford (which also meant their assets were lower than had been assumed up until them), and as this became clear their value dropped. With their value dropping, other financial institutions, funds, and companies that had invested in them saw their assets disappearing, to a point at which some lost their financial viability and collapsed. This, of course, meant even more assets disappeared, etc. Basically, a chain reaction.