An interesting detail, the major investment banks (left standing) like JP Morgan have "arbitraily" increased margin requirements on prime brokerage accounts. Therefore, hedge funds have had to sell their only remaining liquid asset, stocks.
"These calls were not issued because of market losses, but more because the banks arbitrarily decided that they wanted their customers to use less leverage. Margin rates as low as 15% for broker dealers were raised to 35%; hedge funds who had been used to operating on high leverage were told that they had to bring accounts up to a much larger percentage of equity." See here.
It's interesting that JP Morgan and investment banks raised the margin requirments at this time. Perhaps the Fed could have worked out a deal to cover this risk spread, this limiting this rapid move to exit by all hedge funds at once?
"That is what really set this market over the edge -- as the first notice of these calls were issued on October 2nd and 3rd. There was something of a grace period to meet the calls, but funds realized they weren't going to be able to meet them other than by selling stock. There are rumors that the most massive of the calls are due Monday (October 13th). If so, this market could continue to decline through then." See above link.
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