The 2008 financial crisis
Brokers and banks promoted loans including subprime loan to home buyers. Required deposit was as low as 5%. It was once too easy to get a loan approved even the buyer couldn't really afford it, given that house price was going up.
Borkers didn't care about the risk of buyer not able to repay the loan as they earned commissions. The banks beared the risk but they sold the mortgages to investment banks, so the banks earned a bit less but transfered the risk to investment banks.
Investment banks used the mortgages to design complex financial products (different derivatives). They bundled hundreds of mortgages as a security product and sold it to investers.
The security is pretty much like a bond that provides a steady stream of cash earning. Essentially the investors bought the ownship of the mortgages and the buyer's repayment go to the investors.
The only problem is the security was backed by risky mortgages.
Those mortgage-backed securities carried the risk, because if the home buyers were not able to repay, then the investers wouldn't get the repayment or even lose the capital.
-- Why the investors didn't know the risk of the securities?
It's because the investment banks sliced and diced the mortgage-backed products in such a complex way that nobody understood the risk. A mortgage in Florida could be distributed into 100 different derivative products. The problem started here. The 'genius' investment banks like Lehman Brothers created layers of complexity on top of the risky mortages, and sold those 'innovative' financial products as safe investment products.
What made it worse was that rating agencies like Moody and Standard & Poor's gave all those securities AAA rating.
The rating agencies didn't do their job enough or simply got paid for the high rating. Therefore those risky financial products are beleved to be good investment and a lot of investors even borrowed money from banks to invest in those securities. Rember the financial market has a leverage mechanism. You can always borrow more money with a small captital to invest. When you win, yo win more. When you lose, you also lose more. So it was amplified, and the banks and investers both screwed heavily when the real estate screwed.
The securities were considered so safe that insurance companies like AIG even insured the securities without any reserving. That means AIG assumed those financial products had no chance to default. This took some of the risk from investers to the insurance companies.
Furthermore, the financial industry usually takes a short term loan from peers / companies that have cash to lend.
If a bank needs cash to run the daily business, it won't borrow money from the Central Bank because that is the last resort only.
Banks usually borrow money from other banks / companies have a lot of cash. The loan is on daily basis and usually renews every day.
Investment banks like Lehman Brothers used their own mortgage-backed financial products as securites for borrowing money.
That means when those mortage-backed products screwed, they wouldn't be able to borrow enough money to keep business going.
Everything looked great in the beginning. A lot of investment and home buying. The house price was pushed higher and higher. All the fancy financial products and investments were based on that home buyers were able to repay (that's where the true money from). When the bubble is too big, it just couldn't sustain. Some buyers started to fail to repay. Then the problem emerged.
Firstly those investers couldn't get cash repayment as expected. If insured, the insurance company needed to cover the loss. Acutually AIG nearly bankrupted as it didn't have any reserving for those financial products and eventually the government took it over with a 85b cash injection.
When panicking, investers started selling those financial products, or they could lose all their capital quickly. Remember investments were leveraged. Some investers owed too much money to the banks and bankrupted. Banks took houses to auction to recover loss from bad loans. It was harder to get a home loan. House price started to plateau and then drop.
When house price started to drop, the nightmare began. Investers had less faith in those finantial products. Banks didn't recognize the value of the houses, which caused the house price to further drop.
Investment banks suffered as no one bought their products. Insurance companies needed to pay more.
However, is all this enough to produce a financial crisis?
Actually not. If all those houses were declared worthless, the scale of the problem is equivalent to just a bad day in the stock market.
The true problem was investers lost faith in all those finantial products and investments. The securities created by investment banks were so so complex that nobody understood, so when there was a problem, better not investing in any of them, even some / most of the other products were actually good. Investment banks obviously bankrupted too, as nobody bought their products and they couldn't borrow money to contintue their business.
The real estate bubble was only a trigger, but the real problem was amplified via financial products and impacted many industries and investers.
That's how the crisis happened.