Repo's are essential to banking. At the end of the day, a bank must be in a certain financial state. Fluctuations in withdrawls and deposits can lead to a need or surplus of cash. Financial institutions balance their books daily with repos. (The market is HUGE.)
IB's have a need for repo's also, but they often push the limits of sanity. LTCM used repos for large leverage also. (When Genius Failed is an interesting book to read; essentially the crisis of 2007 was LTCM on a larger scale.)
The financial crisis of 2007 was actually a run on banks through the repo market. IB's used repos on a rolling basis with very little margin for error. Suddenly, the haircuts got large and blew them up.
Though this is tangential to the story, I would like to second the recommendation of this paper. On the way to arguing for his thesis, the author explains the function of the modern banking system and the "shadow" banking system in clear and cogent terms. He relates contemporary banking practices to older ones and explains shows how they are similar in the event of a banking panic. Very good (but long) article.
IB's have a need for repo's also, but they often push the limits of sanity. LTCM used repos for large leverage also. (When Genius Failed is an interesting book to read; essentially the crisis of 2007 was LTCM on a larger scale.)
The financial crisis of 2007 was actually a run on banks through the repo market. IB's used repos on a rolling basis with very little margin for error. Suddenly, the haircuts got large and blew them up.
For an excelent paper on the crisis and the repo markets huge (dominant) roll in the crisis, see Gary Gorton's paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882