Many of us were stunned by the great crisis in the financial markets that began in mid-September 2008. In rapid succession came the demise of Lehman Brothers, numerous shotgun mergers of financial institutions (for example, Bank of America and American Express), a sudden and severe freeze in the credit markets, sharp declines in stock prices and, after its initial defeat in Congress, the TARP bailout program.

Although it was widely reported that the crisis was related to securitized mortgages that included risky subprime loans, it seemed at the time that virtually no one understood the causes of the collapse. Even in the fall of 2008, after all, the vast majority of consumers were current on their mortgage payments.

Now, however, an interesting and useful book, Charles Gasparino’s The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System (Harper), helps to explain the origins of the crisis.

Mr. Gasparino recounts that the packaging of mortgages into investment vehicles started around 30 years ago and seemed a defensible enough way of spreading risk of housing loans away from lending banks and making losses more predictable. As a side benefit, it made the loans more available to consumers.

In time, however, a number of developments made mortgage securitization a much riskier enterprise. Financial institutions, rather than merely underwriting the securities, decided to retain (“carry”) some of the issues for their own account, often by borrowing (“leveraging”). This created potential for great profits, but much heightened risk in the event of unfavorable changes in interest rates or default rates The securities were also split up, so that risky but potentially lucrative pieces (for example “interest only”) could be held separately.

But another source of increased risk was government efforts to broaden home ownership to individuals with limited assets or questionable credit histories. The Community Reinvestment Act pressured banks to broaden their pool of borrowers. Two government sponsored entities in the business of encouraging access to credit, Fannie Mae and Freddie Mac, at one point owned or insured half of the $12 trillion in U.S. mortgages. In time, many of the mortgage pools included numerous “subprime” loans to borrowers who could not meet normal credit standards.

There were some earlier crises in the mortgage markets, but the bubble began in earnest after 2001. Housing prices seemed to go up without interruption, and increasingly leveraged holdings of mortgage securities appeared an easy way for Wall Street institutions to make record profits and pay record bonuses. The firms also used the securities to borrow money for operations thorough “repo” loans. Agencies gave unrealistically high ratings to the bonds. Risk models were developed that never seriously considered worst case scenarios. Meanwhile, liberal politicians actively favored easy home loans and President George W. Bush regarded housing as part of the “ownership society”.

Then it all came tumbling down. Housing prices declined, subprime mortgages were often in default, prices for the mortgage securities dropped and then the market completely froze. Fannie Mae and Freddie Mac were taken over after huge losses. Insurance on the mortgage securities proved shaky. Financial firms were has trouble raising cash and things went spiraling downward. Although, as Mr. Gasparino points out, we do not know what would have happened if a bailout had not occurred, people were not willing to take a chance.

Greed, incompetence, and naivete all contributed to the 2008 panic. Obviously, there is much to sort out here in terms of appropriate policies to avoid a recurrence, but Mr. Gasparino has provided a useful roadmap.