Causes of the downside acceleration in stocks

I'll just make a list. All I can say is if we fall below 800 on S&P, the market will crater to 600 very soon! Ouch. However I think the more likely scenario is crazy volatility but above today's levels.

- Letting Lehman fail: This triggered a wave of panic from anyone who held Lehman debt (stockholders would have been wiped out anyways) and more so from the insurers of that debt (through Credit Default Swaps). Just today that debt was auctioned at 9 cents on the dollar meaning the insurers had to come up with the rest which in all is said to have totaled 270 Billion dollars. Additionally, this created confusion as to who would be allowed to fail and who would be rescued.
- Margin calls at large hedge funds: Even the big brokers like Goldman and Morgan Stanley increased margin requirements for hedgies. Since stocks were some of their most liquid assets, they blindly dumped these to raise cash.
- LIBOR widening and no one willing to lend to no one: This is more from a loss of faith in the counterparty. Since most rates in all sorts of contracts (even US mortgages) are tied to the London Inter Bank Offer Rate, this increased financing costs for everyone. In fact, ICICI is paying more than 20% interest for some short term loans to shore up liquidity
- Govt plan to buy equity stakes in banks: Interestingly, although in the intermediate term this will be positive for banks, investors bailed when they realized that their holdings would be diluted even further!
- Short selling ban in financials being lifted: This brought back rumor mongering strategies back into action. Also the etf's that engage in short strategies had short (or effectively short) a bunch of these shares.
- And finally, the back and forth on the bailout plan: If one thing markets do not like, it's uncertainty. The rejection of the plan in the congress was a shocker. Even if they had approved say a smaller bill I think it would have been fine. But first rejecting and then approving just created confusion followed by panic.