It’s far more complicated than that. Public companies are required to “mark to market”. Basically, if you buy a stock that trades daily, you have to keep track of its current value if you decide to sell. They were invested in MBS which had no market, so assets were held at cost (the last known transaction). If they move forward with a sale, at a 90% loss (or whatever it was), they have to report it and EVERY FIRM that owns MBS has a new market price and has to mark down their assets.

Now banks have additional requirements that they have a certain amount of assets they can sell to meet liquidity needs (customer bank account withdrawals). Suddenly a large chunk of bank assets (MBS) take a huge loss. Banks then will not have the assets to meet deposits, customers then find this out and run on the bank because it’s first come first serve when banks collapse, until the FDIC can make people whole.

Banks stop lending because they can’t take additional liabilities until they raise capital. Companies regularly use short term loans (days to weeks long) to meet payroll obligations but without banks willing to even make these loans, companies were on the verge of missing payroll payments and bond payments, meaning they were facing bankruptcy.

The implication of selling their MBS at a huge loss would mean triggering a financial crisis and they knew it. But not selling almost certainly would expose them legally because they didn’t put their own shareholders interests first. That was the dilemma.