Banks may have borrowed more than they needed from central banks over the last 6 months. Knowing the credit markets were coming to an abrupt halt they probably went the most liquid market (equities) they could find and shorted it with borrowed funds.
The FED is trying to "calm the markets" through an open mouth policy and interest rate cuts. Unaware investors would buy the market or buy treasuries. Both actions help banks significantly in selling their treasuries and shorting stocks. When the FED doesn't really do anything, the financial media catches on and effectively yells "fire" in a crowded theater, further helping the banks short positions. The US Gov't doesn't have to bail anyone out since the FEDS and banks engineered the markets to do that for them. The banks will cover shorts when they have enough profits to cover subprime mortgage losses.
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