All went well until someone decided to do this with subprime mortgages — without first bothering to check if the people getting the mortgages could pay them back. When those borrowers defaulted faster than expected, and house prices fell, investors didn't want to buy mortgage-backed securities any more. Big banks churning them out were stuck with hundreds of billions of dollars worth of these “toxic assets.”

Not all of these investments are worthless; some 90 percent of homeowners are paying their mortgages. The problem is that no one knows which securities are going to get hit with the next mortgage default.