After the fall

August 29, 2013, 11:02 AM UTC

The financial crisis landed in our living rooms on Sept. 15, 2008. Early that Monday morning, at 1:45 a.m., a band of lawyers for Lehman Brothers electronically filed for the largest bankruptcy in U.S. history. The government, led by Treasury Secretary Hank Paulson, had told Lehman not to expect a bailout. The reckless bank would not be saved. No last-minute fire sale could be arranged this time — the way Bear Stearns had been swallowed whole, for pennies on the dollar, by J.P. Morgan six months earlier. The way that Merrill Lynch, Wall Street’s venerable bull, was auctioned, over a frantic weekend, to Bank of America.

That morning, as throngs of pink-slipped workers streamed out of Lehman’s Times Square headquarters, dozens of television news crews stationed there captured the event. The images — pinstriped bankers carrying their belongings in boxes — became a visual shorthand for corporate comeuppance.

Today, five years after the fall, they are a subtle reminder of the risk and uncertainty that still weave through the global financial system. Five years ago there was nothing subtle about it.

The Lehman bankruptcy sent a message that went well beyond one broker-dealer’s reversal of fortune. By 4 p.m. the Dow had fallen 4.4%, a one-day drop the market hadn’t seen in six years. As evening fell and morning drew on, investors held out hope that Lehman’s failure might be a containable event, like the mini-crashes in 1989 and 1997. That inveterate American optimism lifted stocks more than 1% on Tuesday. But any hope for containment vanished quickly.

Two weeks after the bankruptcy filing, on Sept. 29, the Dow dropped 778 points — the biggest one-day point drop ever. Share prices didn’t just fall over the next few months, they convulsed. Of the 10 biggest intraday point swings in the 118-year history of the Dow, nine happened that autumn. By New Year’s Eve the market had lost nearly a quarter of its value. Mohamed El-Erian, CEO of bond firm Pimco, told his wife just after Lehman’s bankruptcy to withdraw as much cash as she could from the ATM. “When she asked why,” he later explained, “it was because I didn’t know whether there was a chance that banks might not open.”

What caused so much panic wasn’t plummeting share prices; it was the mess underneath the mess: complex packages of high-risk mortgage securities that had been sold and resold, hedged, leveraged, and partitioned into untold numbers of pieces — and which in a momentary flash of Wall Street realism, now seemed to have little (or unknowable) worth. Firms that had bet big on these impenetrable debt parcels had also borrowed from other banks to keep the lights on in their office towers and to pay thousands of employees. Healthier banks shut the easy-money spigot. But they didn’t stop lending only to their limping brethren. They froze credit altogether.

It took just weeks for companies far removed from the subprime madness to panic and purge. In a year’s time the U.S. unemployment rate spiked to 10% from 6%. Six homes were being foreclosed on every minute. And 401(k)s that had reached all-time highs in 2007 were quickly, cruelly eviscerated.

In fits and starts, Congress and financial regulators stanched the bleeding. First came bailouts of mortgage giants Fannie Mae and Freddie Mac, tacitly putting taxpayers on the hook for $5 trillion of debt. The federal government then propped up AIG, the insurer brought to its knees by the cheap insurance contracts it sold on subprime mortgages. Rescues of Goldman Sachs and Morgan Stanley followed. Next came a massive corporate IV infusion called TARP and an auto bailout. In the fog of crisis the government committed $14 trillion of taxpayer money to various aspects of the financial system, mostly via outright purchases and loan guarantees. The aim was to prevent a second Great Depression. And on that front it worked.

Stock markets are clocking new all-time highs, and 401(k) balances have recovered. Home prices are climbing steadily higher. Fortune 500 companies are posting record profits.

To be sure, millions of Americans are still feeling the morbid and lasting effects of the crisis. The jobless rate, though much lower than it was, remains a dispiriting 7.4%, while that for those under age 24 is a staggering 16%. And if history is any judge, it may be a long time before the job market fully recovers: In two-thirds of world financial crises since the 1940s, unemployment rates never returned to their pre-crisis levels, even after a decade.

Just as the human body has a remarkable ability to blunt the memory of traumatic pain, so, too, it’s easy to forget how frightening the financial meltdown was. Which is too bad. Remembering, after all, can be instructive. It’s at the very least sobering to consider the extent of Lehman’s toxic reach five years ago — a reach that seems almost preposterous when viewed in terms of its unraveling in bankruptcy. It’s at the very least frustrating to know that few of the apparent perpetrators of this fiasco have ever faced judgment in court. Only a handful of midlevel bankers have been convicted of crimes related to mortgage-backed securities. The only Goldman Sachs employee to serve time was a computer programmer — for something that had nothing to do with the crisis.

And it’s at the very least horrifying to know that the same three rating agencies that helped enable the fiasco are back evaluating 90% of all debt. Indeed, little of substance about our vast, interconnected, highly leveraged, nontransparent, global financial system has changed since the crisis (see “Are We Ready for the Next Meltdown?“). The big banks are still “too big to fail.” Strangely enough, even Lehman is technically a solvent company again after emerging from bankruptcy, though it exists only to pay back creditors before it vanishes for good. Hmm. A complex, structured vehicle for paying off debt? Maybe there’s a business model in that.

This story is from the September 16, 2013 issue of Fortune.