Paulson and other regulators stress, however, that there was no buyer to play the role for Lehman that JPMorgan Chase had played in the rescue of Bear Stearns. Had Paulson said from the outset that a government-assisted deal was possible, a buyer might have emerged. Instead, he summoned Wall Street’s chief executives to the Fed, where he said emphatically that there would be no government assistance, as had already been indicated to the press. If this was simply a tough negotiating tactic, Paulson may have overplayed his hand. He succeeded in getting the Wall Street firms to coöperate, which would have provided welcome political cover from likely hostile reaction to another government bailout, but he failed to secure a buyer. Still, he came close. An orderly sale of Lehman to Barclays, with backing from Wall Street, the U.S., and perhaps the British government, might have been within reach. If so, at the highest levels of the American and British governments there was a breathtaking failure to communicate.

Paulson, Geithner, and Bernanke worked tirelessly to save Lehman—within the limits that they believed to be feasible. And those limits, in light of the public hostility toward bailouts of any kind, were formidable. As the Treasury official told me, “With Lehman Brothers, you said the market has to police itself. It was a disaster. With A.I.G., you say you have to protect the system, and that’s a disaster! It’s a Hobson’s choice. You’re not going to win.” Even so, Geithner says, “If we had had the authority to prevent a system threat, I would have been prepared to act despite the political costs.”

Today, it is widely accepted that the failure of Lehman was indeed a disaster. Its unintended and unforeseen consequences—the run on money-market funds most of all—could arguably have been avoided. Yet saving Lehman would not have addressed the broader problem: the capital shortage in the global banking system. It took a crisis of Lehman’s proportions to motivate Congress to act, and, even then, it voted down the TARP legislation the first time.

Lehman’s failure and the aftermath remain a source of widespread outrage and confusion. The inconsistent treatment of Lehman and A.I.G., the unsatisfying public explanations, and the subsequent about-face on the TARP bailout—direct injections of capital rather than buying toxic assets—fuelled public skepticism and, inevitably, conspiracy theories. The one that has gained the most currency focusses on the role of Goldman Sachs, since Paulson is a former chairman of the firm and Goldman was the largest recipient of payments (a total of $12.9 billion) from A.I.G. after it was rescued. But Goldman didn’t have a unique financial motive for the government to rescue A.I.G. According to Goldman, the firm was fully hedged against an A.I.G. failure. A review of an internal document that Goldman prepared on September 15th last year assessing its exposure to A.I.G. suggests that the firm would have come out slightly ahead if A.I.G. had failed.

Had an A.I.G. collapse triggered a global run on all banks, however, it’s likely that Goldman’s insurers couldn’t have made good on their contracts. But, in such a financial catastrophe, a few defaults on A.I.G.-related swaps contracts hardly would have mattered, since by then all banks, and not just Goldman, likely would have shut their doors.

The circumstances of Merrill’s sale to Bank of America also have remained controversial. There was a public uproar over the revelation that Merrill paid $3.6 billion in bonuses before the deal closed. The ex-Goldman bankers Montag and Kraus also got their guarantees, $39.4 million and $29.4 million respectively, even though, in Kraus’s case, it was mere days from the time he began work at Merrill until the deal was announced. On January 22nd, Ken Lewis met with John Thain and demanded his resignation. Bank of America publicly blamed Thain for the bonus payments, maintaining that they were his decision, not Lewis’s. (This despite the fact that the bonus payments were authorized by the document attached to the merger agreement that Lewis signed.) That day, CNBC reported on Thain’s $1.2-million office renovation. Feeling betrayed and unjustly accused, the suddenly unemployed Thain was now a public symbol of Wall Street’s excess. (Thain subsequently reimbursed the cost of the renovation. Neither he nor Fleming took a bonus for 2008.) Bank of America is now embroiled in litigation over what it did or did not disclose to shareholders before they voted to approve the merger.

These controversies aside, one fact is inescapable: billions of taxpayer dollars were invested in the very institutions that caused the crisis. Multimillion-dollar annual bonuses continued, even at A.I.G. Lehman’s Dick Fuld may have had to sell his sixteen-room Park Avenue apartment for $6 million below the asking price—of $32 million—but lenders have commenced foreclosures on nearly three million homes since last October.

Geithner told me, “It seems unjust. But look what happened to the global economy after Lehman failed. Unemployment in the U.S. went to 9.5 per cent. It’s not Wall Street that suffers when you ‘teach people a lesson.’ The tragedy of financial populism is that you do terrible things to innocent people.”

Barney Frank used the analogy of de-Baathification, pointing out that U.S. efforts to purge Iraq of supporters of Saddam Hussein were a disaster. “You can’t go out and shoot the bankers,” he said. “You can’t have an economy without a functioning credit system. People are angry. They’re furious. But you have no option but to live with these people.”

More broadly, the events of that week are likely to redefine the debate over the role of markets in a democracy, and even the nature of capitalism. At least since the Reagan revolution of the early nineteen-eighties, free-market ideology has been ascendant, with even Democratic Administrations following its precepts of market discipline, limited regulation, and unfettered rewards. George W. Bush was only its latest exponent, governing on a platform of economic growth and lower taxes. Yet it was Bush, and his Republican appointees Paulson and Bernanke, who orchestrated the virtual nationalization of the U.S. financial system. Although a vocal minority continues to argue that the system should have been left to the forces of creative destruction, the overwhelming consensus is that free-market principles failed to address a global financial panic. In an intellectual debate that has been going on since the Depression, Lehman’s failure may mark a victory of John Maynard Keynes over Adam Smith—the government interventionists over laissez-faire capitalists.

Congress seems incapable of confronting this reality, especially with many Republicans adhering to pre-Lehman free-market doctrine. Senator Shelby said this summer on CNBC, “I don’t believe anything is too big to fail. We should let the market discipline these banks and if we let them do it, that would help.” The U.S. regulatory framework is a patchwork of agencies that largely date to the Depression and have proved inadequate to restrain market excesses. It seems absurd that A.I.G. would report to a savings-and-loan regulator, Lehman Brothers to the S.E.C., and Bank of America to the Fed. The Obama Administration has started to address many of these issues by proposing new regulations, including expanding the powers of the Federal Reserve to oversee different types of firms that could pose a risk to financial stability, as Lehman did. But thus far Congress, absorbed in the health-care debate, has shown scant interest in enacting any legislation. And, despite outrage over lavish bonuses and much talk about curtailing excessive risk-taking on Wall Street, President Obama has made only a modest proposal for greater shareholder oversight of executive compensation, leaving it to the French to press for stronger curbs on excessive pay.

Meanwhile, the economy is still in a deep recession, with unemployment at nearly ten per cent. But the simple fact is this: America did not plunge into the economic abyss it faced that Thursday night. The bold stroke of guaranteeing the money-market funds stopped the panic and halted withdrawals from the funds. The commercial-paper market slowly came back to life and, with it, the credit markets. Turning Morgan Stanley and Goldman Sachs into bank holding companies with Fed supervision and support stopped the run on investment banks. The details and mechanics of the TARP legislation proved less important than the sense that a comprehensive plan to address the crisis was under way. The reprieve bought enough time for the reëmergence of reason over unbridled fear. ♦