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Three days that shook the world

Exactly three months ago, the collapse of Lehman triggered a global financial panic. Fortune examines what happened in the 72 hours when the world's most powerful bankers met to try to save Lehman and wound up changing the face of Wall Street forever.

By William D. Cohan
Last Updated: December 16, 2008: 4:21 PM ET

lehman_chart.03.jpg
Already ailing, Lehman Brothers' stock took a nose dive in the week before its bankruptcy filing.

NEW YORK (Fortune) -- When the most powerful people in American capitalism convened at the New York Federal Reserve Bank's Italianate palazzo in lower Manhattan on Friday evening, September 12, to try to save Lehman Brothers from certain death, what confronted them was nothing less than the knowledge that whatever actions they took - or did not take - that weekend could push the financial system into the abyss.

Over the next stressful 72 hours, CEOs and their top deputies from Goldman Sachs, Merrill Lynch, Morgan Stanley, JPMorgan Chase, Citigroup, Credit Suisse and other firms worked alongside Treasury Secretary Hank Paulson and Timothy Geithner, then the president of the New York Federal Reserve and now Barack Obama's choice to replace Paulson at Treasury.

Three months to the day that the bankers emerged from that fateful weekend, though, it is clear that the ideals and egos of the participants in those meetings have reordered the American business landscape.

On Friday September 12, there were four major investment banks. Today, there are none recognizable as such. On that Friday, the Dow closed well above 11,000. Today, it is 3,000 points lower. On September 12, a form of "compassionate conservatism" was still the doctrine of the Bush administration.

Today, the federal government has nationalized Fannie Mae, Freddie Mac and AIG. It has bailed out banks with hundreds of billions of dollars of taxpayer money, purchased some of their most toxic assets, and no one is sure where this blurring of the lines between the public and private sector will end. By turning the clock back and looking at what transpired during that weekend, one can see how a transformation of the U.S. financial industry occurred almost in a flash, with the consequences unknown even to people in the room.

"We went into the weekend knowing it was very dark," explained a government official. "There was nobody that was part of this process that did not believe the world was exceptionally fragile and that Lehman was systemic and that the consequences of its default would be traumatic. There was nobody in that room - from the Treasury, the Fed or from the Federal Reserve Board or from the private sector - that could have told you exactly what would happen or what the consequences would be. And I made it clear over and over and again in that room that if we didn't solve this, everything else would be harder to deal with. Solving this was not going to make all the other problems go away but we did not feel we had the ability to insulate the markets from the broader consequences of default."

NEXT: FRIDAY EVENING SEPTEMBER 12 Paulson pulls the fire alarm

William D. Cohan is the author of "The Last Tycoons: The Secret History of Lazard Freres" and the soon-to-be-published "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street" To top of page

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