A year after Lehman's collapse, bank industry is on new path

NEW YORK -- It helped trigger more than a generation's worth of catastrophes in the U.S. banking system. But it was just a year ago Monday that investment bank Lehman Bros. filed for bankruptcy protection — an event widely viewed as a pivotal moment in upending the financial world.

The banking system has been through a 12-month roller coaster — ranging from a period of terror and a complete loss of confidence in the financial system, with the U.S. government injecting billions of dollars, to a time today where the likes of JPMorgan Chase and Goldman Sachs are reporting record profits. "Pendulums don't stop in the middle," says David Wyss, chief economist at Standard & Poor's. "We moved into panic mode last year, and we are now moving in the other direction."

It's been a process that has made one fact clear: The financial system is vital to the functioning of the economy. And the government, having seen the fallout from Lehman's demise, now is much less likely to let the largest institutions fail.

Lehman's collapse sent shockwaves through the economy. Small and midsize companies suddenly couldn't make payroll or pay for supplies. Many rely on large banks to issue short-term commercial paper — basically, IOUs — to provide funds for those expenses, while others rely on bank lines of credit, which were also pulled. Some economists believe the credit squeeze exacerbated job losses and worsened the recession.

Banks stopped lending to each other, and the credit markets froze, leading even large companies to panic. Mall owner General Growth Properties sought bankruptcy protection after it couldn't refinance its loans. Building of schools and highways stopped as states were shut out of financing.