On Oct. 10, 2008, the stock market crashed (Black Week) with Dow Jones Industrial average dropping over 1,874 points or 18% in its worst weekly decline ever with 7.34 billion shares traded the last day.

Although subprime mortgage losses were the most prominent trigger of the crisis, they were by no means the only one. Another, less well-known triggering event was a “sudden stop” in June 2007 in syndicated lending to large, relatively risky corporate borrowers.

Shadow banks are financial entities other than regulated depository institutions (commercial banks, thrifts, and credit unions) that serve as intermediaries to channel savings into investment. Securitization vehicles, ABCP vehicles, money market funds, investment banks, mortgage companies, and a variety of other entities are part of the shadow banking system. Before the crisis, the shadow banking system had come to play a major role in global finance; with hindsight, we can see that shadow banking was also the source of some key vulnerabilities.

Derivatives had a mixed record in the crisis.  Some entities did use credit derivatives as a tool for taking excessive risks, most notably the insurance company American International Group (AIG). In that case, the problem was perhaps less the use of derivatives than a massive failure of risk management, especially by the parts of AIG that took large positions in credit derivatives.

The vulnerabilities of the private sector amplified the triggers of the crisis, creating stresses and uncertainties that posed grave threats to financial and economic stability. The public sector also had important vulnerabilities, which exacerbated the crisis and made the public-sector response less effective than it should have been, both in the United States and in other countries. These vulnerabilities included both gaps in the statutory framework and flaws in the performance of regulators and supervisors.