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 b...