Bascially - they lent too much money where there was too much risk - sub-prime mortgages. When people couldn’t afford to pay back the money they had indirectly borrowed from Lehman, the firm had to write money off - i.e. they lost money. This caused their share price to tumble.
This created a downward spiral that was exacerbated because many potential advisory clients understandably didn’t trust Lehman’s financial advice any longer - if you’re a massive investment bank and have really screwed up your own financial dealings, it looks really bad.
Lehman were negotiating a [[white knight]] bail about from the Bank of Korea last week, which the Bank of Korea pulled out of. By pulling out of these talks, investors lost even more confidence in Lehman (The Bank of Korea obviously saw a good reason NOT to bail out Lehman) and the share price tumbled further.
Today negotiations with Barclays and Bank of America broke down and these banks pulled out of what was probably the last chance for Lehman to be bought out by a private company. This will result in further loss of confidence in Lehman and their share price will no doubt fall further tomorrow.
Finally - unlike Bear Sterns (the first investment bank to lose tons of cash) and Fannie May/Freddie Mack, the American government have said they will NOT bail out Lehman.
So Lehman have no money because they lent out too much too irresponsibly, their share price is about $3 (when it was about $66 12 months ago), no banks want to buy them and the government isn’t going to support them.
If/when Lehman finally collapse, they’ll be unable to pay money they owe others banks, which means other banks lose money, and may also face difficulties. All this also means the whole stock market is likely to lose value because investors are worried about what will happen. Apparently Merrill Lynch is also in a worrying situation - its likely more rumours will fly about, and rumours and lack of confidence mean less money invested and less money available… crash… burn… war… graduate jobs are the very least of everyone’s worries!