"The short answer is their business model does not depend upon a belief system — of solvency, liquidity, profitability or risk management."

Steve Hsu on Information Processing with an interesting post:

"Which raises the question: Why [no] runs on semis or software companies? The short answer is their business model does not depend upon a belief system — of solvency, liquidity, profitability or risk management.

It wasn’t a crisis of confidence that did the iBanks in, it was a crisis of competence.

That was the element CEOs like Dick Fuld, Hank Paulson, Stan O’Neal and Jimmy Cayne failed to consider: When you are a bank, your existence depends upon the confidence of your clients, investors and counter-parties. Anything you do that puts that at risk is extremely dangerous. If you want to run lots of leverage, push the envelope, well, then, you better hope nothing else goes wrong. At 35X, you do not leave any room for error.

It is inexcusable that the investment CEOs did not seem to realize this. It was unconsionable that the firms had been purposefully put into a risk taking position in extremis. That the CEOs blamed short sellers and rumors, but exonerated themselves, only serves to emphasize their own failures, their lack of comprehension of what they had dome to themselves. It was their own incompetent stewardship that purposefully and unknowingly placed these firms at such grave danger of destruction.

Macro modelers take note: no realistic results without accounting for ape psychology. "

This is an important point. I interpret it in the following way:

If the banking system is perceived as unsound, then it is in big trouble, whatever the real situation is. However, I believe that the banks did not believe that the government would let the banking system be perceived as unsound. They believed that any bank large enough to signal such a situation would be saved. They were correct, but the effect of not saving Lehman was to raise doubt about that belief. Once that step had been taken, there was a rush by people to cover their positions in case the government was going to actually let the system take big hits.

This is one reason that there was no option to the government intervening. The idea that the large unsound banks should be left to fail, and that would have no effect on confidence in the banking system in general, just doesn't make sense to me. In this situation, there was no practical choice but intervention. What I fault the Fed and Treasury Department for is not confronting this situation head on and adopting a series of policies that haven't been able to stop the fear and aversion to risk precipitated by this crisis. Sadly, some of their actions, by seeming so panicked and seat of the pants, might well have made the crisis worse.

When you confront a Belief System, you must know the underlying context, presuppositions, and beliefs, that are underlying it. A competent and effective response can't come without that knowledge.