The market's troubles began with rising defaults on subprime U.S. mortgages, home loans made to borrowers with questionable finances. Most of the problem loans were made toward the end of the housing bubble that ended around the beginning of this year, and defaults have been rising on those mortgages. Bonds backed by those mortgages, many of which were purchased by the lightly regulated investment vehicles known as hedge funds, have become difficult to trade, since their value is hard to calculate.

The problems in the mortgage market have also caused some of the companies that make the initial loans to fail and put others under severe financial pressure. With commercial banks linked to these problems in various ways, many investors have become wary of committing money to anything less safe than government bonds.

The subprime sector boomed in the past two years as rising home prices prompted lenders to offer liberal mortgages for eager borrowers. Loans were issued with two-year teaser rates allowing borrowers with limited assets and income to buy homes that might have been beyond their means. The idea was that rising prices would permit borrowers to sell or refinance before their monthly payments rose. That strategy came undone when prices leveled off and interest rates increased, and subprime borrowers began defaulting on their loans.