The 2008 financial crisis resulted from a confluence of systemic failures across housing, finance, and regulation. The main causes were:

1. Subprime mortgage proliferation — Lenders aggressively issued mortgages to borrowers with poor credit. Many loans featured adjustable-rate structures with artificially low introductory rates that reset sharply higher after 2–3 years, triggering defaults when housing prices stopped rising.

2. Opaque securitisation — Toxic loans were bundled into mortgage-backed securities (MBS) and resold globally. Rating agencies assigned AAA ratings to many of these instruments, masking the true risk from pension funds and international investors.

3. Extreme leverage — Major investment banks operated with leverage ratios as high as 40:1 — meaning a 2–3% drop in asset values could wipe out their entire equity base.

4. Deregulation — The 1999 repeal of Glass-Steagall allowed commercial and investment banking to merge, enabling speculative risk-taking with depositor funds. Derivatives markets operated with minimal regulatory oversight.

5. Systemic contagion via credit default swaps — AIG alone had written over $400 billion in credit default swap contracts, creating an invisible web of obligations that collapsed when mortgage defaults surged in 2007–08.

Credit default swaps (CDS) acted as an accelerant in three interlocking ways:

Insurance without reserves — A CDS lets one party pay premiums in exchange for protection against a bond default. Unlike regulated insurance, CDS sellers faced no capital reserve requirements. AIG's Financial Products division exploited this, collecting premiums on vast exposure while holding almost no collateral. When the crisis hit, AIG faced roughly $80 billion in collateral calls it couldn't meet — requiring a federal bailout that ultimately exceeded $180 billion.

Market opacity and hidden counterparty risk — CDS contracts traded over-the-counter with no central clearinghouse, so no one had a complete picture of who owed what to whom. By 2007, the notional value of all outstanding CDS contracts had grown to roughly $62 trillion — exceeding global GDP and representing interconnections that regulators had never mapped.

The cascade effect — Because firms were simultaneously counterparties to hundreds of CDS contracts, any one institution's failure threatened to trigger a chain of defaults. The near-collapse of Bear Stearns in March 2008 was the first visible break in this chain, forcing the Fed to broker an emergency acquisition by JPMorgan to prevent a systemic cascade — a preview of what would become the Lehman bankruptcy six months later.