How can a bank like Lehman go down so fast?

Suppose Lehman faces a redemption and has to repay another bank it has borrowed from. If it sells the mortgage-backed bonds, whose prices have fallen, it will not raise as much as was earlier expected. So, it sells some of the other good assets or bonds which may have nothing to do with mortgages. But since the bank starts dumping these assets, prices of these bonds also dip. This is when the crisis spreads from sub prime to prime.

There are some disclosure issues: Lehman, in its last conference call with investors, gave no clue that it was actually on the brink. An investment bank uses its proprietary book (own money) to lend others and invest. It started with the sub prime crisis. Banks like Lehman, buy mortgage loans from other banks and then package them to sell bonds against the loan pool. Often they add cash to make the loan pool more attractive, so that the bonds can be sold at a higher price. Such disclosure issues is what I think made the collapse inevitable.

No easy answer to that. Maybe, some of the accounting norms need to be changed, so that the definition of MTM gets narrowed down. Besides, to stop banks from going overboard, capital requirement may have to be raised for derivatives position. But all this may be easier said than done.