NEW YORK (CNNMoney.com) — It started last summer when borrowers with weak credit started defaulting on their mortgages. Last night, it brought down an 85-year-old pillar of Wall Street.
How did we get to this point? How did rising foreclosures among subprime borrowers lead to Bear Stearns being scooped up in a fire-sale for two bucks a share?
The answer starts with investment banks: They sold complex securities backed by debt that was a lot riskier than most realized. The realization that the banks had failed to manage this risk sparked widespread concern among investors and other financial firms. Suddenly, investors found they couldn’t put a value on much of what the banks were selling. As a result, the lending markets that keep Wall Street humming seized up because people feared they wouldn’t get paid back.
“We got to the point where the various parties in the financial system started not to trust each other,” said Lawrence White, an economics professor at New York University.
What’s worse is that no one knows when it will end.
Every week, it seems, another part of the U.S. financial system falters and the federal government has to …
