Larry McDonald was living just a few blocks from Lehmans' Manhattan headquarters when he discovered that his former employee was one bank that wasn't too big to fail.
Now a bestselling author, the former Lehman vice-president advises hedge funds, pensions and others on risk using the lessons he learned at the bank. But five years ago he was as shocked as many of his colleagues at the cataclysm. "A group of us had left in the spring and summer before the collapse, worried about what was going on there. But I had millions of dollars in restricted stock that I couldn't sell," said McDonald.
His mobile phone died several times that September weekend, drained by a battery of calls from worried colleagues. He had heard rumours that the bankers and regulators looking at Lehman were considering letting it fail.
"Close friends told me it was like musical chairs, and you are without a chair," he said. But he felt that after the government had stepped in to save Bear Stearns, a smaller bank which presented less risk to the global financial system, regulators were likely to act. He still feels they should have.
The collapse of Lehman triggered a financial meltdown that convinced government officials they had no choice but to bail out the next domino. "Capitalism changed after Lehman," he said. "Suddenly the government was picking the winners and losers." The days that followed the collapse were horrific for McDonald and his colleagues. Careers were ruined, fortunes lost.
"People were picking up their belongings, friends were crying. It was a very dark day for the banking industry."
In the aftermath, he said, he felt angry about the way Lehman had been mismanaged. Now he feels the blame for the bank's collapse goes wider. "Lehman was grossly mismanaged. But so was Countrywide [once the largest seller of sub-prime loans], so was Washington Mutual. What annoys me is Washington playing God," he says. "For 90 days in 2008-09, the US was a dictatorship."
A very small group of people, including then Treasury secretary Hank Paulson, his replacement, and the then New York Fed chair, Tim Geithner, and Federal Reserve chairman Ben Bernanke were making all the decisions. "Considering the weight of all the decisions they had to make, they did a good job. But did they do a good job with Lehman? No."
He believes Washington needed to let a bank fail in order to push through the troubled asset relief programme (Tarp) that bailed out the banks and others. Lehman was that victim.
"They gambled and they got through it," he says. "But the cost was higher than anyone had thought. And who knows how the lessons of Lehman will complicate government action in the next crisis.
"We are still learning the lessons of Lehman," he says. For now McDonald's eyes have turned east. "I see increasing signs of systemic risk over there," he says.
"The next crisis will start in Asia."
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