According to a paper by the BCBS, here is an excellent summary of what happened. Based on this,
Choice 'c' is the correct answer.
"At the outset of the crisis, mortgage default shocks played a part in the deterioration of market
prices of collateralised debt obligations (CDOs). Simultaneously, these shocks revealed deficiencies in
the models used to manage and price these products. The complexity and resulting lack of
transparency led to uncertainty about the value of the underlying investment. Market participants
then drastically scaled down their activity in the origination and distribution markets and liquidity
disappeared. The standstill in the securitisation markets forced banks to warehouse loans that were
intended to be sold in the secondary markets. Given a lack of transparency of the ultimate ownership
of troubled investments, funding liquidity concerns were triggered within the banking sector as
banks refused to provide sufficient funds to each other. This in turn led to the hoarding of liquidity,
exacerbating further the funding pressures within the banking sector. The initial difficulties in
subprime mortgages also fed through to a broader range of market instruments since the drying up
of market and funding liquidity forced market participants to liquidate those positions which they
could trade in order to scale back risk. An increase in risk aversion also led to a general flight to
quality, an example of which was the high withdrawals by households from money market funds."
