This is from the an article/interview from Geoff Colvin with Mohamed El-Erian (Pimco CEO) from Fortune (21st of December 2009). I think it is the best explanation of the financial crisis I have ever read.
Geoff Colvin asked "What really happened back then?" and Mohamed El-Erian answers:
You go to a McDonald's. You order, you go to one window, you pay; you go to the next window, you pick up your food, and you go. You normally can do it within 30 seconds. Now imagine the following. There's a payment window where you pay, and there's a settlement window where you take the burgers. Now imagine that you go to the first window, and they tell you, $5. You say, "Where's my food?" And they say, "It's at the next window." You say, "I heard what happened at Lehman yesterday. At Lehman someone paid but didn't collect. So I want my food now." And they say, "I can't give you your food now." The whole system is built on trust—that you're going to trust for 10 yards. And you say, "Well, that's what Lehman did. I'm not going to do that." Now what happened to that system? First, you go away hungry even though you had money. And the second window has the food but can't sell it, so the food goes rotten. The system breaks down because no one trusts 10 yards between the first window and the second window. That is what happened after Lehman. It was the most amazing thing, where nobody trusted what we all take absolutely for granted, and therefore you couldn't match people up. That's why we saw these amazing collapses around the world.
