(FORTUNE Magazine) – For a decade, dumb money ruled on Wall Street. In the 1990s telegenic analysts promised investors that Internet stocks would quadruple--which they did--and were paid millions for their prescience. Fund managers ponied up for allotments of hot IPOs that sent their performance and their pay packages into the next galaxy. Stockbrokers foisted tinfoil tech stocks on clients and basked in the commissions. What could be easier than that? Funny how many of those folks are now broke, unemployed, or under investigation.

For Wall Street's very best and brightest, though, the 1990s were remarkable in an entirely different way. Careers were built and vast fortunes were made, only the gains didn't evaporate like rain puddles in the June sun. Indeed, streams of money continue flooding into certain pools, stealthily, even as most of the Street trudges through one of its darkest runs in decades.

So who is the smartest of the smart money on the Street these days? If the standard you judge by is not just making a pile of money but keeping it too, the biggest winner on Wall Street right now is a man you may not have heard of. He is Stephen Schwarzman, CEO of the buyout firm the Blackstone Group.

Schwarzman's firm, which he founded with Wall Street grandee Pete Peterson 18 years ago, has grown into a singular powerhouse almost perfectly positioned to take advantage of today's perverse market conditions. Its restructuring business is reaping a windfall from the record number of collapsing companies. Its buyout fund is now the largest of all time--it just pulled off the biggest LBO since RJR Nabisco 15 years ago--and is poised to benefit from corporate fire sales. In real estate it is making a fortune selling properties. And it has built an enormous franchise in hedge funds just as that business is booming.

More than that, Blackstone sustained almost no damage in the age of irrational exuberance. Consider the competition. At Citigroup, Sandy Weill, the subject of humiliation by e-mail, oversees a troubled empire. Phil Purcell of Morgan Stanley is chastised by SEC Chairman Bill Donaldson for not getting the fact that his firm acted improperly. Merrill Lynch's Stan O'Neal is negotiating legal settlements and downsizing. John Mack at CSFB has the Quattrone mess and the DLJ merger (still!) to sort out. And the list goes on. Blackstone has none of these hindrances, and therefore isn't being sued by Bill Lerach, fined by Bill Donaldson, or investigated by Eliot Spitzer. That is an incalculable competitive advantage. "A lot of guys on Wall Street can hit the long ball, but right now Steve is the man to beat," says J.P. Morgan's influential vice chairman Jimmy Lee.

How does Blackstone do it? Well, you might suppose that no one on Wall Street is making money off Enron anymore, for instance. You'd be wrong. Blackstone is heading up Enron's restructuring, a monstrous project that aims to maximize the value of the company's assets so that creditors (can you say dumb money?) can get a few pennies back on the dollar. Blackstone's Bruce Haggerty, a 25-year-old analyst who only a few years earlier vamped with Billy Crystal at a Hasty Pudding event at Harvard (Crystal was in drag), labored for six months writing proprietary software to map out the bankrupt energy company. Haggerty created a complete picture of Enron on his desktop computer--all 2,000-plus entities accounted for in a dynamic model in which the values of the pieces change when assets are moved. Printed out, his Rosetta stone comes to 6,000 pages. Engaging Blackstone could well be the best money Enron ever spent on Wall Street, but the work won't come cheap. Bankruptcy filings show Blackstone could be paid as much as $17 million for its trouble.

Though you may not know of Schwarzman yet, in moneyed quarters he is attaining the stature of his more famous partner, Peterson, now 77 and the firm's chairman. Generally soft-spoken, Schwarzman is thoughtful yet likes to cut to the quick. He has intense, icy-blue eyes that seem to bore into you. "My biggest job really is to figure other people out," he says, scrutinizing a dinner guest. "I need to understand what makes a person tick."

Schwarzman, 56, owns what may be the most expensive apartment in Manhattan and is buying one of the priciest homes in Palm Beach. He displays other Master of the Universe attributes, including a fabulous art collection, a power wardrobe, and an attractive, blond second wife several inches taller than he is. In spite of the glitz, though, neither he nor Blackstone hit the headlines much. For one thing, the firm is a private partnership. For another, most of its deals are in unsexy nuts-and-bolts businesses. And one more thing: Since the firm's founding, Schwarzman and Peterson have assiduously avoided the equity businesses that are now causing Wall Street so much pain, such as underwriting, research, and trading.

We're in Schwarzman's 31st-floor Park Avenue offices, just around the corner from the Four Seasons restaurant (which they call Blackstone's cafeteria), and I ask him: How could you resist getting into the equity business in the roaring '90s? Wasn't that where all the glamour and big money were? "Oh, it was easy," Schwarzman says in his cool and calculated way. "There's way too much capacity in all of those businesses. Since I joined the business in 1969, there has been a radical decline in the number of firms in sales, trading, and brokerage. So we didn't go there."

Today Blackstone has a portfolio of six businesses: restructuring, buyouts, a small M&A group, hedge funds, corporate debt, and real estate. No one else on Wall Street has created anything close to it. The other buyout firms like KKR, Texas Pacific, and Carlyle are rivals, but Blackstone is bigger and in a wider range of businesses. Although returns in Blackstone's buyout funds have been weak on an absolute basis lately, over the longer haul, according to the most recent figures available, they have been superior: 20% annual appreciation net of fees in its first fund, 35% in its second, and 25% in its third. Blackstone gets a 20% cut of all investment gains. There's also fee income. About $13 billion of the firm's assets earn about 1%. That's right--Blackstone rakes in some $130 million in fees per annum. And then there's the income from the restructuring operation, which is Blackstone's healthiest business right now. Out of all of that, King Steve gets a very healthy slice. "I would say Steve takes home $50 million a year just from the recurring [fee] business, never mind any of the upside, which is huge," says a former Blackstone executive.

From the start, Blackstone has been a buddy act, combining Schwarzman's tenacity and Peterson's golden Rolodex. Commerce Secretary in the Nixon administration, Peterson has been CEO of Lehman Brothers and Bell & Howell, and has served on the boards of RCA, 3M, General Foods, Federated Department Stores, Continental Group, Black & Decker, and Cities Services. "From the beginning it was both their smarts plus Pete's connections and Steve's incredible drive," says Roger Altman, a former Blackstone partner and deputy treasury secretary in the Clinton administration. And Blackstone is always "hanging around the hoop," says Tom Lee, who manages a giant buyout group that competes with Blackstone. "That's what got them the TRW deal."

The deal that Lee is referring to is the $4.7 billion buyout of TRW Automotive, the biggest LBO since RJR Nabisco. It's the kind of big, hairy, wooly-mammoth buyout that Blackstone is all about.

The point man on the deal for Blackstone was a Yorkshireman named Neil Simpkins who read physics at Oxford and topped that off with an MBA from Harvard. Whether or not Simpkins knows what "hanging around the hoop" means, he certainly put himself in a position to score with TRW. "A couple of years ago I was looking around in the automotive sector because the valuations looked good, and I didn't think there would be any strategic buyers," Simpkins says. (A strategic buyer is an operating company that acquires a business to complement its operations, as opposed to a financial buyer, like Blackstone, that acquires a business as an investment.) "I thought that TRW's aerospace business and automotive didn't belong together, because automotive dragged the value of aerospace down."

In August 2001, Schwarzman sent a letter to TRW CEO David Cote with an offer to buy his automotive business (big in brakes, steering systems, and airbags). Cote was receptive and dispatched his CFO, Bob Swan, to meet Simpkins in New York. But there was no urgency to do a deal, and negotiations proceeded slowly through the fall. Then, on Feb. 19 of last year, came two bombshells. First, Cote left to take the top job at Honeywell. And second, Northrop Grumman made a $12 billion hostile bid for TRW. "It was totally out of the blue," says Simpkins, "but we immediately knew that Northrop didn't want automotive, and that put us in a good position." Simpkins had to move nimbly, though. He couldn't in good faith negotiate directly with Northrop, and he also had to beat back other financial buyers like the Carlyle Group and Bain Capital, who began circling. "But we had been there," says Simpkins. "We had the credibility and the size to pull off the deal." (That's hanging around the hoop, Neil!)

After negotiating through the spring and summer, Blackstone, TRW, and Northrop agreed on a complex monster deal. Northrop would buy TRW and sell the automotive business to Blackstone for $4.7 billion while retaining 19.6%. Blackstone would put up $700 million of cash, mostly from its $6.45 billion fourth private equity fund--the biggest buyout fund ever. The bulk of the deal is funded by selling junk bonds. Blackstone paid 4.7 times Ebitda for the company, well below the six times that is currently considered pricey.

On Feb. 28, some 18 months after Blackstone's letter to Cote, Simpkins took his team for a hearty celebration dinner at Sparks, the old-school New York City steakhouse. (When you pull off a multibillion-dollar car-parts LBO, you don't whoop it up with nouvelle cuisine, do you?) But hold the sirloin a minute, Mr. Schwarzman. Isn't TRW Auto a dog company in a woof-woof of a business? "First of all, we're going to work on it," he says, looking slightly amused by the question. "And there's a cycle to the business. Plus, that's conventional wisdom." Blackstone's investors pray that Schwarzman is right. At some point down the road Schwarzman will look to sell this company for much more than the $4.7 billion he paid for it. A huge motivating factor: Blackstone partners and employees have over $1.5 billion of their own money invested directly in the firm's funds. "I sleep well at night knowing that my money is invested right alongside Schwarzman's," says a banker with ties to the firm.

Steve Schwarzman and Pete Peterson first crossed paths at Lehman Brothers some 30 years ago. Peterson, a self-described policy wonk who is chairman of the Council on Foreign Relations, made his name in the Nixon administration. (During a recent breakfast interview, Peterson showed me pictures of himself negotiating with Leonid Brezhnev.) Peterson went on to Wall Street and became CEO of Lehman when the firm nearly imploded in 1973. Schwarzman, whose father owned a linens-and-drapes store in Philadelphia, graduated from Yale in 1969. (He founded a ballet society there, in large part, he says, to meet girls. Today he is on the board of the New York City Ballet.) Then he went to Harvard Business School, where he drove a VW Beetle around Cambridge, accumulating quite a number of parking tickets. Hired by Bill Donaldson at Donaldson Lufkin & Jenrette, Schwarzman soon migrated to Lehman Brothers and became a partner in 1978, at age 31.

Lehman Brothers back then was considered one of Wall Street's premier institutions. A private partnership going back to 1850, the firm had bright lights like Peterson and the young Schwarzman, plus names like Richard Holbrooke, Eric Gleacher, and Roger Altman. In part because of this amalgam of explosive talent, Lehman was ripped apart in 1984 after a power struggle between co-CEOs Peterson and Lew Glucksman. The firm was sold off to Shearson American Express, to the dismay of the Street's old guard.

Schwarzman and Peterson struck out together in 1985, forming an M&A boutique and putting in $200,000 each. It was Peterson who came up with the name Blackstone, a nod to the national origins of both men: Schwarz is German for black and, petra is Greek for stone. "The relationship worked because they were 20 years apart, like father and son--they didn't threaten each other," says an old colleague from Lehman Brothers. "They have a love-hate relationship," says another source. "Pete thinks he made Steve, and Steve thinks he made Pete."

The young firm landed some name clients like CSX, Sony, and Firestone, but Schwarzman was after bigger fish. "You could see what KKR was doing" in the LBO boom of the mid-1980s, he says. "We knew that was a terrific business." But Blackstone faced Wall Street's classic chicken-and-egg dilemma. How do you raise money without a track record?

"In the beginning, it was grueling," Peterson tells me over a breakfast of Post Bran Flakes and fruit. "My wife told me she never imagined me as Willy Loman." The low point was when the pair was in Boston calling on a state pension fund. The wrong guy showed up at the presentation and had no idea who they were. Peterson and Schwarzman walked out into a downpour.

Finally they got a bite from an executive at Prudential. "He said, 'I like you guys. I'll give you $100 million,' " recalls Peterson. "After that we got money from Jack Welch [at GE], and we were on our way." Blackstone would end up raising $850 million, the biggest first-time fund ever.

Early on, Schwarzman and Peterson laid out some ground rules: They decided not to do hostile deals. And they figured out that it would be to their advantage to use Peterson's connections to partner with companies in their buyouts, which has become a hallmark strategy of the firm. (It has teamed up with everyone from Verizon to Vivendi.)

After the first buyout fund closed in 1987, Schwarzman and Peterson began to consider other businesses. Schwarzman brought in Larry Fink and Ralph Schlosstein to build Blackrock, a bond business, which later split off on its own. Blackstone created a hedge fund of funds, parceling out pots of money to managers who promised the partnership absolute returns. That idea mushroomed into a fund-of-funds business that now has $6 billion.

Two of Blackstone's other businesses, real estate and a corporate debt fund, don't always have the same profile as the others but are also large bets that have played well. The debt business takes the form of a $1.1 billion mezzanine debt fund, which is financing for private companies after they have raised venture-capital money but before going public. Investments include the Vitamin Shoppe and 24 Hour Fitness Worldwide. In real estate Blackstone has $2.3 billion in active funds, making it the third-biggest group in the U.S. Blackstone owns office buildings and hotels all over the U.S., generally preferring fixer-uppers. In Britain it owns four of the top seven superluxury hotels in London: the Savoy, Claridge's, the Berkeley, and the Connaught.

Blackstone has come a long way since the 1980s, and some say so has Schwarzman. "I remember him as profane," says someone who hasn't spoken to him in many years. Says a former Blackstone person: "When you work for Steve, you get paid $10 million, but Steve's will is your command." You could field an all-star Wall Street baseball team with partners who have bolted from Blackstone, many of them after run-ins with Schwarzman. That would include Roger Altman; Henry Silverman, CEO of Cendant; David Stockman, Ronald Reagan's OMB director; Larry Fink of Blackrock; Glenn Hutchins, founder of buyout firm Silver Lake; and others. (It will be interesting to see if the firm's most recent high-profile hire, feisty former Treasury Secretary Paul O'Neill, fits in.) Says someone who witnessed one of these breakups: "There was a lot of yelling and name calling. It was the biggest goddamn fight I've ever seen on Wall Street."

It's a coolish May evening, and the New York City Ballet is having its Spring Gala, a black-tie supper ball in the Promenade of the New York State Theater at Lincoln Center. After the performance, Schwarzman and his wife, Christine Hearst Schwarzman, make their way through the flurry, greeting friends like Lesley Stahl and Judge Kimba Wood. Actor John Lithgow kicks up his heels on the dance floor as CNBC's Maria Bartiromo chats with friends at a nearby table. There are other Wall Street types here, like Bob Lipp of Travelers and Jeff Peek of CSFB, but Schwarzman is the alpha from that world. Guests make a point of shaking his hand and introducing kids. I ask Schwarzman about stories of fighting with Blackstone partners who've left the firm. "That stuff is old, decades old," he says as Christine pulls him onto the dance floor, where they will boogie to Barry White. "I've really grown a lot since then."

Steve and Christine Schwarzman live in a jaw-dropping Park Avenue triplex they bought from fallen insurance mogul Saul Steinberg for some $30 million in March 2001. (Schwarzman sold his previous residence to none other than Dennis Kozlowski--er, make that Tyco?--for $18 million.) Once owned by John D. Rockefeller Jr., Schwarzman's 20,000-square-foot apartment has 35 rooms, including a gym; a steam room; a sauna; a billiards room; a screening room; and servants' quarters that feature a dining room, three bedrooms, and two baths. For Schwarzman's 55th birthday, an entire floor was decorated to look like his favorite restaurant in St.-Tropez (where he owns another home). "It is a $100 million apartment," says an individual who's been there and who knows the market well. "That's the value of the apartment, plus the work and the art he has put in. The Twombly is worth $5 million alone."

When the New York winters get too brisk, the Schwarzmans can look forward to Four Winds, the 13,000-square-foot Palm Beach mansion they are buying. Built for E.F. Hutton in 1937, it is a rare property that stretches from the Intracoastal Waterway to a 300-foot oceanfront. The Schwarzmans also own homes in East Hampton and Jamaica. So just how rich is Steve Schwarzman? "I'd say he's worth $600 million to $700 million," says one business associate. "More than a billion," says a source close to Schwarzman.

The house of Blackstone is not without blemishes. In 2000 the firm opened a $2 billion telecom fund, Blackstone Communications Partners, which has been a dud. And then there's the black eye that is Sirius Satellite Radio. Blackstone got involved with Sirius in 2000, investing $200 million for a 10% stake in the company, which had gone public in 1994.

Sirius has been beaten up by the lead player in this business, XM, which inked a deal with GM. XM now has 483,000 subscribers, while Sirius has only 68,000. Last year Sirius had revenues of $805,000 and lost a staggering $468 million. The company has tried to right itself by doing a major restructuring, converting $636 million of debt to equity, giving the company one billion shares outstanding, and diluting existing shareholders by some 92%. The stock now trades for $1 and change. A while back, Merrill Lynch satellite analyst Mark Nabi summed it up nicely, saying of Sirius: "Listen up--get out while you can."

Back in June 2001, Peterson joined the Sirius board, a signal to outside investors that Blackstone wasn't going to abandon ship. But Peterson's presence on a board isn't always enough to save the day. In the fall of 2001, he joined the board of a company run by one of his tennis buddies from the Hamptons. Oops, that would be Sam Waksal's ImClone Systems. Peterson lasted about two months. When the company began to emit a nasty odor from the insider trading scandal, Peterson left.

In Blackstone's busiest group, though--its restructuring business--the firm is fixing broken companies rather than investing in them. "We went into restructuring because it does well in bad times," says Peterson with a grin. "Like now." Here again Schwarzman hired well, picking up Art Newman, a teddy bear of a guy, from Chemical Bank. Newman's team has toiled on dozens of workouts including Chiquita Brands, Dow Corning, Global Crossing, W.R. Grace, Macy's, and Xerox. "Nothing comes close to Enron, though," says Newman. "In my 30 years in the business it is by far the most complicated bankruptcy ever."

It was the day before Thanksgiving 2001, and Newman's partner Steve Zelin was thinking more about turkey than turnarounds when Peter Atkins, a senior partner at law firm Skadden Arps, called to tell him the board of Enron wanted to engage Blackstone immediately. "We had our dinner and then flew to Houston early the next morning," says Zelin. He had only had the vaguest idea of what was awaiting him.

"We tried to get our bearings," says Zelin. "We met with Ken Lay and senior management." Zelin flew back to New York. "We met with the Dynegy people to do the merger, but it quickly became clear that wasn't going to work. We had all the parties assembled in the Westchester Convention Center," he says. "I remember there was a wedding in the next room with loud music playing." That Sunday, lawyers went hunting around Houston for a bankruptcy judge to take the company into Chapter 11. Enron filed for bankruptcy on Monday, Dec. 2. The creditors and Blackstone agreed that the company's trading business could not operate in Chapter 11. Selling that business became Blackstone's next task. Zelin and his team worked 15-to 20-hour days through December and into January. There was a daily 5 P.M. conference call for two straight weeks with Schwarzman and other senior members of Blackstone. "This was incredibly complicated and high profile," says Zelin. "The firm's reputation was on the line. We couldn't afford to fail."

The buyers came down to Citibank and UBS, and an auction was held. Finally, on Jan. 11, after a marathon 24-hour negotiating session, UBS agreed to buy the business for a cut of future profits. (The deal hasn't been a great one for the Swiss bank so far.) Zelin was exhausted, in part because he knew the rest of the restructuring was left to do. "We needed to figure out what are the company's assets and what do we do with them," says Newman. (Which is where young Bruce Haggerty's Enron map came in.) "The job is to maximize the value of the estate, as well as minimizing litigation," he says. "The art of the deal is compromise. You kind of want everyone to be equally unhappy."

Every Monday, each of the six Blackstone business groups meets and is joined by Schwarzman, numbers whiz James Mossman, and vice chairman Hamilton "Tony" James, whom Schwarzman recently hired from Credit Suisse First Boston. James, formerly a senior banker at DLJ, is taking on more oversight of Blackstone as it grows too big for Schwarzman to watch over alone. "I'm also here to bring Steve new ideas about expanding the firm," says James during lunch at San Pietro, another restaurant favored by Blackstone partners. James has another critical role: He is considered to be Schwarzman's heir apparent.

To succeed in the buyout game, indeed, on Wall Street, you need brains, nerves of titanium, and a fat wallet. "Steve always had the first two," says Jimmy Lee of Chase. "I remember in 1995, when Union Carbide wanted to sell an electrode maker it owned called UCAR. They were going to take it public and were already doing the road show for the IPO, when Steve called me up and said he wanted to buy the company." What about the road show, the IPO, Carbide's plan? Didn't matter. "Steve said he knew this deal, and he knew it was right," says Lee. "We had to come to Carbide with a home-run deal in this case, no whiffing." They did, and Carbide quickly accepted. "And it turned out to be a very smart bet that worked out great," says Lee.

Did you miss the UCAR deal? Probably. After all, it took place during the roaring '90s, when we were all too busy watching our portfolios fly. Well, now they have returned to earth, and so has the rest of Wall Street. Most of it, that is. Right now Schwarzman and Blackstone are flying on.

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