What are sub-prime mortgages ?

In the US subprime Lending is primarily advanced to cusomter who
typically have low credit scores and histories of payment defaults or
bankruptcies. According to S&P subprime originations totaled $421
billion in 2006. Due to a big plunge in the housing market from the
last 18 months subprime lenders felt the heat as most of the customers
failed to meet the payments ending in foreclosures.

How is subprime connected to Financial Companies,Hedge Funds and
Investment Bankers?

Majority of the Top notch Investment Bankers, Hedge funds and
Financial Companies in the US, Austrailia, Europe and even Chinese
Banks(unconfirmed reports say Bank of China might take the hit) as
part of their diversification strategies invest in subprime mortgage
based companies either directly or indirectly. The extent of
investments are completely left to the individual companies. The
downturn has indeed affected every one in the industry. While the
biggies are likely to absorb the hit the small and medium sized
companies with greater exposure to subprime are likely to collapse.