Demise of Bear-Stearns and Lehman Brothers

How did these two venerable names on Wall Street end up in bankruptcies? This American Life did a fascinating show on NPR, called: The Giant Pool of Money. The basic outline is as follows:

• The great news around the world is that we are getting richer! Humanity has never been richer in its history. It is also getting older, especially in the industrialized countries. As a result, there is the so-called giant pool of money, all the savings from everybody in the world. This money needs to be invested somewhere. When it ran out of super-safe avenues to invest (mainly bills, notes and bonds of US Treasury), it started looking for higher returns (at the cost of higher risks) such as pools of mortgages in the US.
• Bear-Stearns, Lehman Brothers and other Wall Street investment banks went to work creating investment vehicles to satisfy this enormous demand. They kept going to lower and lower quality mortgages in order to supply the need.
• All this was fine and dandy while the US house prices were going up. Once they stopped going up, the show was over.

Here's another link that explains this. Warning: It uses (completely unnecessary) foul language.