Our friends at BBC News explain what caused the global financial crisis, mortgage crisis, and lending crisis in a great and simple way:
US mortgage-backed securities were the investment products that sparked the global financial crisis in 2008.
In essence, each security or bond was linked to pools of US mortgage loans, many of which were classified as sub-prime – mortgages awarded to high-risk and low-wage homeowners.
When many of those homebuyers defaulted on their mortgages as the US property bubble burst, it turned the linked securities into bad debt.
This caused billion-dollar losses at banks, who were forced to write down the value of their investments.
Banks around the world were affected, not just those in the US, because the securities were resold globally.
The securities had been widely purchased because rating agencies had mistakenly given them the highest possible credit rating.
As banks realized they were sitting on huge liabilities, they halted lending to each other, freezing up the global financial system in the process and making it harder for businesses and individuals to borrow funds.
Source: BBC News