2008 Financial crisis

Short answer: Commercial banks lent housing loans to people who then pay monthly instalments, then these commercial banks sold mortgages to investment bankers who had lots of money with them. Now they have mortgages with them and receiving monthly instalments from people who took loans. They now did some finance stuff and created "collateralized debt obligation(CDO)" which were like bonds with a fancy name. They cut it into 3 pieces with low risk, medium risk, high-risk bonds. Credit rating companies gave thumbs up and gave AAA, BBB and no rating respectively to 3 types of bonds. These investment banks fill the boxes(bonds) with the money they get from monthly instalments. Now they sold these CDO's to private investors who thought these bonds are less risky and had good credit ratings too. Till now everything is fine!!

BTW these investors bought some outsider bonds because that time US federal bank interest rate was just 1%.  People were willing to take house loans because the housing sector was on boom and pricings were increasing continuously.

Now comes the bomb!!

Investors were continuously investing in CDO's and these investment bankers need more and more mortgages to meet the demand. So they pressurized commercials banks to give loans to more people but there were no more people to take loans. So these commercial banks gave loans to people who were not able to repay these loans. Why did banks do that? They don't really care about repayment because they were ultimately selling those mortgages to investment banks so now it's their risk. So commercial bank gave loans to all types of people without any background check. Later as everyone expected those poor families were not able to pay and were defaulted. Now those houses come to commercials banks which means investment banks ultimately. Now, these investment banks have more mortgages and receiving less cash. These bankers put these houses in the market for sale and the no. of houses were increasing rapidly in the market and buyers were almost negligible. So automatically housing prices were dropping exponentially(those many people defaulted). This created problems for people who are paying regularly. As the houses in their neighbourhoods were up for sale their own house rates were decreasing. They end up paying so more than their home's worth. (When they bought the house worth was 300000$ not it's something like 90000$). So, they thought why the hell should we pay? So, they quit paying monthly instalments. So the empty houses were even increasing and prices were drastically decreasing. Now get back to our investment bankers who have all the mortgages in form of worthless houses. And they could not payback investors the bond's interest as they have no money but all have was a bunch of worthless houses. These bankers call their buddies investors and asked to sell their CDS but they are not stupid so they say no thanks.

So whoever hold these bonds all were gone and couldn't get rid of them. Investment bankers try to sell the mortgages to commercials banks they were not willing to buy them. So eventually all these investment banks were bankrupted. Now investors call the homeowners and tell them that their investment is worthless. It's also called as "US housing bubble"

US Companies involved:
Investment banks:

• Goldman Sachs
• Morgan Stanley
• Merrill Lynch
• Lehman Brothers
• Bear Stearns

US Retail Banks:

• Citigroup
• Wachovia Bank
• Washington Mutual
• Bank of America
• Wells Fargo

For more details and concepts:
http://www.wikinvest.com/wiki/2008_Financial_Crisis