I read 'Liar's Poker' a few years ago and it was a fascinating insight into the people who work on Wall Street (or did during the 80s). The author of that book has written an article chronicling the insanity that has led us to the financial turmoil we find ourselves in. Most of it will be familiar to many people, mortgages being sold to people who had no hope of repaying them, this toxic debt being packaged up to look like low risk AAA rated bonds and the fallout when this debt started turning bad.
the article mostly talks about Steve Eisman, who seems to be one of the financiers to see this trouble coming and started shorting the market. Ironically this actually made things worse...
But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower.
Which may help to explain why things have got so bad. Not only have a lots of loans gone bad, but lots of fantasy loans that never actually existed have gone bad as well.