If you want to figure out what is all the fuss about subprime mortgages and the economic turmoil they seem to be inflicting, BBC’s Robert Preston has a good extensive summary.
Here’s the bottom line: for the past few years, Wall Street has operated a giant machine for turning mind-boggling amounts of US home loans – which are hugely vulnerable to losses from fraud and the inescapable cycles in interest rates and housing prices – into supposedly risk-free investments for risk-averse investors in Asia, the Middle East and (as it turns out) for Europe’s big banks.
He doesn’t explicitly mention hedge funds, but these are behind much of the complex debt restructuring, slicing & dicing mentioned here.