US Economy is totally credit based Economy and so is their life style.
For a layman, Lehman brothers just borrowed money from some financial institutes with interest and landed that to their clients at some higher interest rates. Now their clients are unable to payback the money and hence the Lehman Brothers. All their credit is now their debit ..... so bankrupt.
I hope i am right ....... Economist plz let me know 
Yes Vijay , you are very right , US economy is a consumption economy. Earn less , spend more kind of! Take , borrow finances /loans etc ... is their main way to finance.
Abhi has explained it well and Prashant has given nice article , but still let me try and explain.
Imagine me in US a couple of years back.
The housing was in a boom. Everybody was buying houses and somehow people were forced into thinking that house prices cannot go down. So people were buying , selling at higher price , taking profit , agian buying and selling at higher prices etc etc. There was a lot of buying from everyone because credit was available cheaply ( Almost all banks were too lineant on lending standards , no credibility , ability to repay etc were checked ). So everyone was buying houses. This created the housing price bubble.
Now how does the process work. A small bank will give loan to customers. Then it would bundle all such loans into a package and give it to the so called smart guys at investment banks!(eg Lehman). They will create complex products out of these. The rating agencise (S&P , Moodys , Fitch etc ) will rate these products. Now these smart guys at the investment banks made it so complex that even the rating agencies were sucked into rating these very highly ( Also add to the woes of a couple of bugs in the models of these rating agencies and i am not kidding : Moody themselves accepted of a programming bug in their CDO rating model programme).
Now investors buy them ( mainly institutional investors like buy side firms like my company and other hedge funds , money mangers m sovereign wealth funds of emerging countries , oil rich countries et c etc.)
Now when the bubble reached an extent where it was no longer sustaineable that it will continue , things started falling ( Add to that the US central bank and policy makers were seeing all the boom happening so because of high oil prices and food prices caused inflation , they had to hike their rates so credit was getting rich to hold on , and money was getting sucked back from the economy a bit , so everyone started feeling the pain ranging from consumers to the companies , so on one hand started a thing of default of people and on other side selling of the complex securities which were held , so these banks etc star ted feeeling the pain and people were brought back to reality.
And the big lesson I learnt in finance is that it is not about the actual price or value , it is about what the market feels it is. Once the house prices started falling, all the short sellers ( and yes they do exist in housing market as well ) started pocketing the profit and so there was big supply causing an increasing spiral of decreasing home prices , add to that the default rate jumped up and the investors panicking and more selling.
Our CIO calls this as delevering of financial institutions. All institutions were highly levered meaning their assets to debt ratio was very high , once they started to get that down , more forced selling leading to less prices and more collateral calls*** and thus more forced selling. All is a negative feedback loop.
Collateral calls : Now this is important concept , Other than the Exchange market there is personal market called OTC ( Over the Counter) , in this market there are mutual agreements between I-banks and other financial institutions and there are rules that if a certain event triggers they have to post a certain collateral to the counterparty.
Imagine people having these agreements with Lehman , once Lehman was going down , everyone triggered in these contracts and posting collateral calls , now in any case lehman was facing liquidity concerns , more collateral calls means more capital raising by forced selling of even good assets and meaning more losses , all this is negative self feeding.
Add to the woes the rating agencies showed all the things of wrong assignments and wrong risk determination meaning investors to improve their risk profile by selling more risky assets implying they even go down in price!
the sole hopes of recovery were wiped out!
Fear gripped in and there was no trust among the counterparties. Situation is so worse that the LIBOR ( London Interbanking Lending rate : the rate at which banks lend money to each other )spiked up so high that people made comment that LIBOR is getting to the point where Banks DO NOT lend money to each other
Althought the pivot was the bursting of housing bubble but the self feeding loop and the wave of delevering ahs made it into a crisis of sorts!
In nutshells present day people are paying the price for excessive innovations for greed of the couple of years back i-bankers(the so called smart guys
).
Phewww.. i tried my hand and tried to be easy enuf ! Let me know if u need details!
fall in usa market in the ongoing lehman bros. bankruptcy issue. indian media has a tendency to blow things out of proportion. in 2000-2001 usa markets fell by 50% only to recover back... they still are showing a growth rate of 3%.
