Market participants lost confidence in their trading partners, and, as the crisis unfolded, the financial sector struggled to cope with a massive withdrawal of liquidity, the collapse of one of its most prominent institutions, and a 40 percent drop in equity prices.
2 The effects of the crisis were felt far beyond the financial sector as credit dried up and a mild recession became something far worse. You are also, no doubt, familiar with the political response to that crisis. After considerable debate, the Congress passed sweeping reform legislation designed to place the nation’s financial infrastructure on a more solid foundation.