Quoted:
Index fund crash.

Quoted:
The govt had very little to do with it.  Mortgage brokers were chasing fees, the banks were chasing fees, the people buying the CDO's were chasing yield.  Nonconforming and Subprime loans offered higher yields and fees.  It was a shit show. The bankers got greedy and it blew up in their face.  They did not learn a damn thing because the govt. bailed their ass out.

Quoted:
Mortgage backed bonds are simply instruments that pay out cashflows that come from the underlying mortgages. There are several different types.

A CDO is a broader category. A MBS can be thought of as a type of CDO. A CDO can exist without actually being backed by the underlying asset, instead using derivative products bundled together. They end up essentially being a side bet on the underlying asset, in a sense. So, the money simply comes from a counter party that is willing to bet against you.

These positions may not be "naked" in the sense that the people using the CDOs or derivative products may have certain exposures (like they've sold insurance against a product, and are trying to offset some of the risk associated with that) that they are trying to hedge. Or, they could simply be speculating.

It gets complicated in a hurry.

The market meltdown can boil down to this. The government had been subsidizing the housing market for a long, long time through federal lending programs. This helped people buy houses even though they couldn't normally have gotten loans via normal processes at banks. These mortgages had insurance on them, the government promised to pay the banks if the borrower's defaulted. These mortgages were fairly uniform debts, they shared a lot of common features, and they were all backed by insurance (VA/FHA). GNMA and the other agencies would buy these mortgages from the issuing banks. This put cash back in the banks, so they could make more loans. Then, GNMA and the others actually collected on the mortgages. To fund this process, GNMA and the others issued bonds, which were backed by the payments coming from the mortgages, and these mortgages were all insured by the government, so it was pretty safe. These bonds were the first real mortgage backed securities. The issuing banks thus made their money issuing new loans and flipping them over to GNMA. And it's all funded by investors who are buying the MBS's because they want real estate exposure with a lot of safety.

Fast forward 40 years. Banks don't have a lot of incentive to really verify all the info on a loan, because they don't really sit on it and bear the default risk. The borrower's don't have any incentive not to lie on the loan application, because they want to buy as much house as possible. Lots of other MBS's and credit default swaps, and CDOs are now floating around, as everyone figured out how to make money in every direction as often as they could. The credit risk ratings on MBSs are different than bonds, even though they kind of look the same, so a lot of people were fooled into thinking they were safer than they actually were. Sometimes companies just lied about the risk level.

All of the major banks have multiple insurance contracts, CDS's, and interlocking arrangements built up upon this system. This basically isn't really a problem, as long as everyone has enough cash to pay out and keep the financial faucets flowing.

Until... people who've borrowed too much on their mortgages start having trouble paying for them. Some of them got floating rate loans, and the rates go up. Their payments go up. They can't pay them. They start to default.

A lot of the MBS's that have been issued aren't backed by government insured mortgages. Or even if they are, the thing is, the MBS payments aren't insured. Or you were in the wrong tranche, so the payments you're supposed to get on your MBS get axed. Maybe it defaults.

No problem, you think, we bought an insurance product (CDS) on the MBS, so when it defaults, our counter party has to pay out. And that's important because you are on the other side of some other insurance like products, and you need to start paying your counterparties on those contracts. As long as the payments all happen, like they are promised to, it works.

But, as it turns out, your insurer is also having cash flow problems, because a lot of their contracts are starting to pay out. They are having trouble meeting their obligations, due to everyone trying to collect at the same time. So they can't pay you, even though they definitely owe you payments. And now you can't pay out on your obligations. So you're gonna screw over the people you owe money.

Welcome to contagion. Liquidity problems start to propagate across the market. People can't pay because people aren't paying them, and this causes a real shit show of defaults.

That's why it's called a "credit crisis". When liquidity dried up, it didn't matter what you were supposed to have on paper. Your insurance products were crap, not because you were stupid, but because the person on the other side just couldn't live up to their end of the bargain, because someone on the other side of them didn't hold up their end, and round and round it went.

Quoted:
A fifth grader can debunk your theory.
The housing market crashed in December of 2008.
Obama was inaugurated on January 20th 2009.

Quoted:
The govt had very little to do with it.  Mortgage brokers were chasing fees, the banks were chasing fees, the people buying the CDO's were chasing yield.  Nonconforming and Subprime loans offered higher yields and fees.  It was a shit show. The bankers got greedy and it blew up in their face.  They did not learn a damn thing because the govt. bailed their ass out.

Quoted:

A fifth grader can debunk your theory.
The housing market crashed in December of 2008.
Obama was inaugurated on January 20th 2009.

Quoted:
Obama worked the banks when he was a senator and before.  Not as president.  And I did not say as president.  Obama and his cohorts, fellow democrats.  You can read some newspapers about how he pressured the banks to issue loans to subprime lenders,

And get an education before insulting someone who knows more than you do,

Quoted:
Add "Too Big To Fail".  Its from the perspective of the US Treasury.

Quoted:
Yeah, if you have a couple hours, watch it.  Good flick and pretty close to how it went down.

And it even honestly showed how no one responsible was held accountable.

Quoted:
Excellent explanation though you left out one detail. Due to the ease of borrowing, housing prices started to rise.  The subprime buyers were only the catalyst. Once the prices started going up, everyone got in on the action. As perceived values increased, more people were motivated to sell and “trade up”.  Additional people began to buy speculatively on investment properties by leveraging their current assets. Home equity loans were taken to buy “investment” vacation homes. More home equity loans were taken for home improvements to “increase the value” of the properties. Prices continued to go up and up. People were buying and selling across all income brackets until it reached a big ass bubble. Even joe middle class was getting greedy on the ride up at this point. Values peaked sales slowed down values dropped and everybody was so over leveraged that their assets were no longer valued anywhere near their debts.  That’s when the cracks started to show in the damn. A free people saw the cracks, but when it broke, boom, it was quick ride to the bottom.

Quoted:
Technically it goes all the way back to Carter.  Clinton is the one who really drove it into the ground though.