I can't remember who said it, but someone argued that banks are inherently bankrupt. Their business model is to borrow short and lend long. The reason is that if you're a sensible business then you'll have cash reserves to smooth short-term cash-flows. So if your aim is to maintain reasonable liquidity, then someone else has to take the other side of that "trade". That "someone else" are the banks.

There are also other problems. Cheap and easy money. Banks have one tool to increase returns: leverage. So they lend to other institutions where they can get an interest rate differential. As too much money chases too few opportunities, the inevitable happens: instruments appear to cater for the demand. But they will be of lower quality. As the bubble continues, returns go down and the quality worsens. On paper, everybody is coining it in. UNTIL. The credit markets tighten for whatever reason, someone defaults, sending dominoes toppling throughout the entire industry. When things turn sour, the situation doesn't degrade gracefully, but collapses catastrophically.

Rules can help only a little because the basic model and drive to make profit are both the same. The payoffs are also asymmetric due to agency risk. The people making all these deals have no skin in the game. They get huge bonuses for making the big deals, but they don't lose their houses if everything collapses.

What's the fix for all this? Well, it's probably endemic to the system, but not necessarily a lost cause. As someone one sense "a business that is too big to fail is too big to succeed." It may seem like a trite slogan, but there's merit to the argument. Our local building society (I guess it's what in the US they call Savings and Loan) sailed through past crises unscathed. They just didn't invest in all that subprime nonsense. So if there is a fix, it probably amounts to breaking up the big banks into lots of regional ones. Maybe. Although noboy is going to do that.