What led to Lehman Brothers Holding's bankruptcy?

Answer could have been made more informative by giving simple answers to complex terms like "collateralised Debt obligations".

Nonetheless the answer explained the tragedy in simple terms

Lehman makes money by, among other things, lending money for home mortgages Obviously, the more money lent, the more profit.

In the 80's and 90's and into the early 2000's, real estate prices went up astronomically. Mortgage companies such as Lehman's saw a chance to make additional money by extending loans to questionable lenders (folks who would not have qualified under normal circumstances). They did this by creating what could be called speculative mortgages that allowed people of dubious financial means to borrow now at a lower interest rate and lower payments with the promise to pay back later at higher interest rates. Both Lehman and the home buyers expected that real estate would keep appreciating, allowing the borrowers to finance down the road when their incomes increased and the home value increased - these new loans would be at fixed interest rates and be more affordable to the buyer (see the part about increased incomes).

However, the market soon peaked. Real estate prices no longer went up at 10-20 percent a year. The first folks to get hit were the speculators - especially in such places as the two coasts where folks were buying second/vacation homes. Speculators plan on "flipping" land (buying now to sell it soon at a profit). When the market stagnated, investors could no longer flip and started losing money. These speculative investments soon went on te market, but with investors no longer buying, the market demand was reduced and the investors soon started flooding the market with these properties, driving down prices.

This soon snowballed as more and more folks got caught up in falling markets. Soon, all those speculative loans extended by Lehman and other banks hit the adjustment point and interest rates on the mortgages went up, some very severely, causing payments to go up. Unluckily, the rest of teh economy was stagnating and the expected income increases never materialized. Couple the stagnant wages with some drastically increased mortgage payments and people started defaulting on mortgages. The folks who had planned on refinancing found out that their homes had not only not appreciated, but had fallen in value. Thus, they owed more on their mortgages then the houses were worth. Now, no bank would refinance because banks won't lend more than a house if worth. Since folks couldn't refinance to more affordable terms, and couldn't afford to pay the new payments, they started defaulting.

Banks with higher performing, better (read more conservative lending policies) will be able to ride this out. Banks/lenders like Lehman, etc. who have higher levels of these speculative loans are being hurt as folks are getting foreclosed on and the foreclosure sales bring in less money then the person owed.