Financial innovators found increasingly exotic ways of packaging loans for investors. Securities became so opaque that few understood their risks. Originators sold mortgages to investors whose due diligence consisted of glancing at ratings. The financial system became increasingly complex, interconnected, and hyperleveraged.
When housing prices plunged, the value of real-estate-related assets on the balance sheets of financial institutions, both in the traditional and shadow banking sectors, collapsed. Not only were many of those institutions highly leveraged, they had also relied heavily on short-term borrowing to acquire those assets. The combination of leverage and short maturity funding left them perilously vulnerable to runs.