Eventually, they woke up to a very rude shock. Since the financial system was so interconnected, one ripple is all it needed to create a tidal wave in such an unstable scenario. Banks’ irresponsible lending meant that eventually, individuals defaulted on their mortgages. Once this cycle of defaults started, it spilled over from mortgage companies to investment banks.
Of the five large investment banks in the US, one defaulted, two got sold, and two others had to be rescued by the government. The fear and panic that gripped the financial markets meant that banks were reluctant to lend to each other – markets froze completely.