Bankruptcy of Lehman Brothers; bailout of AIG. How did this happen?

Let’s ask Warren Buffett, investment guru:

If [AIG] had never heard of the word derivatives, they’d be doing fine. They’d be going to work in the morning and they would have no troubles … I said they were possibly financial weapons of mass destruction, and they had them. They destroyed AIG. They certainly contributed to the destruction of Bear Sterns and Lehman …

… I would say the biggest single cause was we had an incredible residential real estate bubble. I mean you can go back to tulip bulbs in Holland 400 years ago … human beings going through combinations of fear and greed and all of that sort of thing, their behavior can lead to bubbles … 300 million Americans, their lending institutions, their government, their media, all believed that house prices were going to go up consistently … lending was done based on it, and everybody did a lot of foolish things.

Saving the best for last:

… they had all these types from Wall Street, you know, and they had advanced degrees, and they look very alert, and they came with these – they came with these things that said gamma and alpha and sigma and all that. And all I can say is beware of geeks, you know, bearing formulas …

Source

Warren Buffett: I Haven’t Seen As Much Economic Fear In My Adult Lifetime – Charlie Rose Interview – 1 October 2008