1. The problem starts with mortgage borrowers across the US defaulting on loans which were set up over the last few years. These loans were typically offered at discounted rates in the early years – when the discounted rates elapsed, monthly repayments increased and the number of individuals unable to meet these payments multiplied.
   
2.  Unbeknown to the mortgage borrowers, their debt had been sold on to other financial institutions – typically investment banks, who repackaged these loans with other forms of debt, which they themselves may have sold on – typically to hedge funds…. 
   
3. The sub-prime debt was able to be sold freely as it was packaged together with safer debts. The suggestion is that the ultimate holders of the sub-prime debt did not know what they were getting into
   
4. The major UK commercial banks may have lent to hedge funds or acquired the repackaged debt, and it has proven very difficult to identify the extent to which they are exposed to defaulting debtors. They therefore have a long period of assessing the extent of the damage.

It will take the banks some time to ‘lick their wounds’ and gauge their appetite to risk in the future.

However it need not all be doom and gloom. If there is still a good business case for lending, then banks will still be willing to back transactions – although many of the "mind boggling" substantial private equity transactions may be on hold for a while.

There are many other sites which cover this situation in more detail than I have, please see http://www.telegraph.co.uk/ or http://www.bbc.co.uk/blogs/thereporters/robertpeston/.