The money was never really there.

The short answer is that the cost of borrowing money is supposed to be based on risk. If you are a low risk you pay less than somebody who is a high risk. As the value of mortgages moved through the financial system (see below), the risk was not being priced correctly. This means that investors at the far end of the process had not paid enough to cover the chance that their investments might go bad. Those investments are now going bad and investors now have to back fill their payments. They don't have enough reserves to do that and it is crushing some of them. Add to that the banks are looking at their reserves and getting worried, so they are not lending money cheaply anymore. This means that any company that lives on borrowed money (like an insurance company or poorly run investment firm) is at risk.

It started with the housing loans that people really couldn't afford. The loans get put into a pool bought by investment companies who issue bonds. The bonds would be paid back from the value of the pool of mortgages. The bonds get insured based on their risk rating. Some (many?) pools of these loans was rated by rating agencies as being good, but they were garbage. Since people were buying homes with no money down there was no reserve value in the house. The loans start to go bad. The overall value of the pool drops. Bond issuers need to pony up more money to insure the bonds. Money they do not have.

So, who owns these bonds? Banks, insurance companies, investment firms. All sorts of people indirectly. And that is why this is so bad.

NPR and This American Life did a great job of explaining it in their report A Giant Pool of Money. You can listen to the report at that link.