In the cases of the 1987 stock market crash and the 1998 implosion of Long Term Capital Management, the damage was contained by quick emergency actions initiated by the Federal Reserve. By 2007, unfortunately, the now familiar perils of poorly underwritten assetbacked securities, liquidity strategies based on asset prices, and high leverage had pervaded the financial system.
Systemic risk arose not because the illiquidity or insolvency of one firm would directly bring down another, but because of parallel hedging or funding strategies practiced by highly leveraged firms with substantial short-term liabilities that threatened large segments of the market.