Having deconstructed what could go wrong with the financial industry in the US, let us look at what went wrong.
Asset-Backed Commercial Paper is the term used by banks and mortgage lenders to describe the pool of mortgages lent to folks to buy houses. Ideally, the mortgages were done with people who had jobs, some savings and the likelihood of making the regular monthly payments on the mortgage loan. Described as AAA credit risk by the credit rating agencies, banks and investment houses ran the math (It’s rated AAA it must be good) and bought the packaged loans.
The quants (remember them?) plugged the new numbers into their assumptions formulae and spit out ‘buy’ recommendations by the truckload. Now the banks and investment houses could run their debt to cash ratios as high as they wanted to and did, leveraging the AAA rated loans.
The problem was that people who wouldn’t normally be trusted to have a library card were being pre-approved for huge mortgages if they could fog a mirror and make a mark on the documentation. Due diligence by the mortgage lenders? None. Due diligence by the customers signing the mortgage? None. They signed for multi-thousand dollar mortgages knowing there was no way in hell they’d ever be able to make the payments.
Even the finance industry got into it. Finance pundits looked at the ratings of the Asset-Backed Commercial Paper and screamed Buy! Investment joints ran this stuff through derivatives, hedging bets left, right and center. On paper, as long as house prices kept going up, ABCP and the multilevel derivatives were making everyone money on The Street.
Insurance companies, like AIG, insured both ends of the derivative of derivatives transactions. Heck, it was all rated AAA and the quants kept their assumptions tweaked enough to ensure that on paper, everyone involved was exposed to next to zero-risk and on paper, the investment joints were so solvent they could branch out into higher risk investments. If they didn’t, then they weren’t working the market efficiently, using the shareholder’s money to “increase shareholder value.” Shit Jim, Merril is paying a huge dividend, why they hell aren’t we? If we don’t meet our ‘whispered’ number, then we’ll be downgraded, our bonus won’t be as big and we can’t go on the sales trip to Belize!
Except it was all based on the assumption that house values would go up and the mortgage loans were performing.
Oh yeah. That’s right. Someone paying down the mortgage. Let’s get back to you on that one.
RoadDave 
Your autopsy is closing in on the problem(s). But don’t forget to give the government its due by hectoring banks to make mortages in the name of the "ownership society" and other non-worthy goals. It still comes down to greed. Everybody was trying to make a fast buck from the lenders to the people "buying" the property to be their own private ATM.