How did 'crisis' spread through the financial system in '07-'08? How did 'crisis' spread through the financial system in '07-'08? Specifically, what is the process by which a subprime mortgage impacts the health of the credit markets as a whole? An explanation in the context of securitization would be appreciated.

I understand that subprime mortgages are sold to special purpose vehicles but the process is muddled from there.

I don't need a mathematical explanation, a clear conceptual explanation would be perfect.

Thank you!
Essentially, there was a bank run in the repo market.

The repo market is where big institutions (like, say, Fidelity) deposit large amounts of cash for short periods of time with institutions like, say, Bear Stearns.  Bear Stearns, in order to guarantee that it won't run away with the money, allows Fidelity to hold some valuable assets belonging to Bear Stearns in the meantime --- say some bonds.

Now Fidelity comes to believe that these bonds are worth only, say, 80% as much as it previously believed, and therefore asks for more bonds by way of collateral.  So, at around the same time, does everyone else.  But Bear Stearns only owns so many bonds, so it can't satisfy everyone.  If you've ever seen "It's A Wonderful Life", you know what happens next.

That, at least, is Gary Gorton's story, and it seems very plausible and is widely endorsed.  Of course there are many competing stories as well.