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One year later, the peak moment of the financial crisis still brings out intense emotion. That emotion is on the mind of Richard Fuld. He was the CEO of Lehman Brothers, which collapsed in September 2008. When a reporter recently tracked him down at home, the former executive joked that at least the reporter didn't bring a gun. Lehman's collapse was the most dramatic moment in a month when credit markets all but stopped working.

NPR's Jim Zarroli reports on how the events of September 2008 created the economy we're living with today.

JIM ZARROLI: When September 2008 got underway, the U.S. economy was limping along under the weight of a deteriorating housing market. By the end of the month, everything had grown even worse, says Michael Holland, who owns his own investment firm.

Mr. MICHAEL HOLLAND (Investment Firm Owner): There's no doubt that my mindset a year ago was one of living in a surreal experience, a dream almost, a bad dream. Things were happening in the financial markets that were almost definably impossible.

ZARROLI: The roots of the problem lay in subprime mortgages, which had become hugely popular on Wall Street. They were packaged to securities and strewn throughout the financial system. With the housing market losing steam, nearly every investment bank, hedge fund and mortgage lender faced losses.

The first to totter that month were the mortgage companies Fannie Mae and Freddie Mac, which were taken over by the federal government. But they were only the beginning.

Professor MARK GERTLER (Economics, New York University): You didn't - literally didn't know which financial institution was going to go down next.

ZARROLI: Economist Mark Gertler of New York University says the administration and the Fed had engineered an unpopular takeover of Bear Stearns at taxpayer expense months before. Now they had to decide whether to save other institutions.

Prof. GERTLER: It was kind of a no win situation. I mean, you were left with a choice of either bailing out these institutions or letting a calamity happen. And no policymaker wants to be in that position.

ZARROLI: Suddenly, the U.S. investment banking sector was in critical condition. U.S. officials arranged the sale of Merrill Lynch to Bank of America. Merrill's chief executive John Thain spoke to reporters.

Mr. JOHN THAIN (CEO, Merrill Lynch): This is probably the most difficult environment in the financial markets that I have experienced in my 30 years in the business, but it is a cycle and we will get through it.

ZARROLI: But the government drew the line at Lehman Brothers, allowing it to go bankrupt. Michael Holland says the decision sent a chill through the financial markets.

Mr. HOLLAND: Lehman had relationships and securities and dealings with businesses and people and institutions throughout the world. And their absence from those markets and from those securities and from those dealings just vaporizing themselves made the world awash in uncertainty as to, you know, what to do with all of those Lehman things.

ZARROLI: After Lehman's collapse, investors could no longer be sure when the government would step in to rescue a financial institution. They pulled their money out of stocks, bonds and almost every other kind of investment and put it in cash. Again, Mark Gertler.

Prof. GERTLER: Once there's fragility in the market, a sense of fragility, panic and runs can take place. And there was incredible stress. Also, the deeper fear was that the credit markets would dry up, and once that would happen, then you see the effects on the real economy.

ZARROLI: And Gertler says that's exactly what happened. Businesses that depended on short-term loans could no longer get credit. Croton Auto Park in New York's Westchester County had already seen business fall off because of rising gas prices and tougher leasing terms. Owner Lou Giordano says the credit crunch made things much worse.

Mr. LOU GIORDANO (Owner, Croton Auto Park, New York): The people that were in the market for cars couldn't get credit like they could before. The way it used to be in the past is if you had good credit, you could get another payment or get finance on a car. Now all those rules changed.

ZARROLI: Giordano ended up laying off about a 10th of his staff. The same thing happened across the country. As business activity fell off, the nation's unemployment rate climbed to its current high of 9.7 percent. U.S. officials seemed determined never to let another major financial firm collapse.

The Fed would organize an unprecedented series of actions to prop up the financial markets, and the Obama administration backed a massive economic stimulus program that remains deeply controversial. One year later, the recession seems to be ending, but the memories of last September are a constant reminder of just how fast the bottom can fall out of the economy.

Jim Zarroli, NPR News, New York.

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