It started in a mood of eerie calm, but then 2008 exploded into a global financial earthquake. Nick Mathiason and Heather Stewart look back at events that shook, and brought down, giants

It was the year the neo-liberal economic orthodoxy that ran the world for 30 years suffered a heart attack of epic proportions. Not since 1929 has the financial community witnessed 12 months like it. Lehman Brothers went bankrupt. Merrill Lynch, AIG, Freddie Mac, Fannie Mae, HBOS, Royal Bank of Scotland, Bradford & Bingley, Fortis, Hypo and Alliance & Leicester all came within a whisker of doing so and had to be rescued.

Western leaders, who for years boasted about the self-evident benefits of light-touch regulation, had to sink trillions of dollars to prevent the world bank system collapsing.

The ramifications of the Banking Collapse of 2008 will be felt for years if not decades to come. Here, Observer writers pick out the three pivotal weeks that shaped a year of unforgettable and remarkable events.

Week one: 9-15 March

For the first two months of the year, there was an eerie calm. By the end of February, all was quiet save for global banks routinely updating queasy investors over the tens of billions of dollars they had lost by fuelling the madness we now know as the debt catastrophe.

At the start of the year, a global economic meltdown still seemed unimaginable to many. Even Rupert Murdoch's economic brain Irwin Stelzer refused to countenance that the financial world was spinning off its axis, suspending judgment until a $150bn tax rebate by George Bush announced in January - equivalent to $1,000 for every American household - worked its way through the system. If by May that didn't stem a freefall in US consumer confidence, rising unemployment and plunging house prices, then he argued, perhaps we were in trouble.

But, during the first two months of the year, a lingering belief remained that perhaps the vicious economic hurricane might blow itself out before it hit the real world. That changed during the week beginning 9 March, seven days in which the real storm broke and swept away some of the biggest and most revered names in international finance.

It began on Sunday evening with an unbelievable personal fall from grace and ended with the most spectacular American banking collapse seen in decades.

Late that night, Eliot Spitzer, New York governor and the scourge of Wall Street banks, called his closest aides. The former New York attorney-general, who did more than anyone to prosecute bulge-bracket banks following the scandalous fin de siècle ramping up of internet stocks, admitted he had been caught on a wire tap confirming plans to a young woman to join him in a private room at the so-called Emperors' Club where New York's wealthy elite bed prostitutes.

As the once proud defender of the people against the excesses of capitalism sank into the quicksand, financial storm clouds swiftly gathered overhead.

The following day, Blackstone Group, manager of the world's biggest buyout fund, revealed it had suffered a 90 per cent profit drop during its fourth quarter. Headed by New York society figure Stephen Schwarzman, Blackstone perhaps more than any firm exemplified the gung-ho leverage mania. In January, it was one of a small consortium of private equity firms that gambled $31.3bn to buy the world's biggest casino company, Harrah's.

Blackstone spent hundreds of billions of dollars on consumer and leisure firms as well as the betting on the latest investment craze: clean technology. Now its strategy was unravelling, placing the businesses it bought in serious jeopardy.

In Britain house-builder Bovis meekly warned that unless there was an urgent cut in interest rates, the property market would collapse. It was a message the Bank of England failed to heed until much later.

On Tuesday, there was blind panic on Wall Street. The US Federal Reserve injected $236bn (then, £117bn; now £152bn following the pound's collapse) into the American banking system. Few asked the question: would it be enough? Other central banks followed and Citigroup, the world's biggest bank, was forced to forked out £1bn to bail out six of its hedge funds. A process that would bring Wall Street and the world's banking system to its knees had begun.

It meant that when Alistair Darling, in his first Budget, said the UK was well placed to withstand the effects of US turbulence, no one quite believed him. Darling's speech, in which he downgraded his growth forecasts, raised taxes and admitted the UK economy faced its biggest slowdown since Labour came to power, was effectively blown out of the water.

If there was hope that perhaps Thursday would bring a sense of calm, more news from America shattered that illusion. The most revered name in private equity, and for many an extension of American foreign policy, the Carlyle Group, admitted that one of its funds could not repay its debt. For every $1 of equity, the $22bn Carlyle Capital Corporation fund was leveraged with $32 of loans. In other words, it toppled over under the weight of unsustainable debt.

That day, the price of gold reached a record, trading at $1,000 an ounce. CCC's demise would not be the last big-name casualty.

In fact we had to wait just one day for the next one. As rumours over the health of Wall Street's fifth-largest investment bank prompted clients to pull their cash out of the institution, on Friday morning, New York time, Bear Stearns received an emergency bail-out from the Fed and JP Morgan Chase. It was America's Northern Rock moment. One of Wall Street's biggest names had all but gone under. Global equities dived. Venezuela opened oil contracts in euros to hedge against the dollar - a canny investment strategy - and the market started fearing for other big names. They would not have to wait very long.

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Week two: 14-20 September

On Sunday Federal Reserve and US Treasury officials met at the central bank's lower Manhattan base to hold tense talks with the chairmen of the biggest investment banks in the world. The goal was to secure a saviour for Lehman Brothers, America's fourth largest bank, ahead of the opening of Asian markets that evening.

There was just one problem. Hank Paulson, the former Goldman Sachs chief who was US Treasury Secretary, refused to sweeten a Barclays or Bank of America takeover of Lehman's with public money. The two suitors edged away.

Lehman had spent the last five years amassing a huge commercial property loan book. It was a kingpin in securitising sub-prime debt. Its abrasive chairman and chief executive, Dick Fuld, had attempted to finesse a merger with the Korean Development Bank. But the Koreans walked.

Meanwhile Ken Lewis, Bank of America's boss, that night concluded a lightning-fast deal to take over Merrill Lynch. So began one of the most tumultuous weeks ever seen on Wall Street.

Glued to their BlackBerrys all weekend for the latest news, Lehman's 5,000 London staff turned up to work on Monday to find administrators from PricewaterhouseCoopers handing out leaflets at reception. They announced that their employer was bankrupt.

Lehman's London traders found they could not do business with counter-parties. New York had sucked the money back to base. London had been cut adrift. As the day continued, staff left Lehman's Docklands HQ carrying their belongings in boxes. The building became a stop on the London tourist trail.

That morning Chancellor Alistair Darling knew the Lehman effect would ripple far and wide. He held fraught talks with the Financial Services Authority's then chairman, Callum McCarthy, and Gordon Brown. Uppermost in their minds was concern over HBOS, the UK's biggest mortgage seller. That evening, Brown steered Lloyd TSB chairman Victor Blank into a quiet corner during a party. The prime minister said he would waive competition law to allow Lloyds to take over HBOS.

On Tuesday morning, Darling, McCarthy and Bank of England governor Mervyn King met to review the crisis. They decided HBOS directors had to be told that 'soldiering on wouldn't do'.

Meanwhile, on the other side of the Atlantic, Ben Bernanke, the US Fed chief, was in a corner. The world's biggest insurance company, AIG, had seen its stock market value collapse. There were fears that if the firm, sponsor of Manchester United, were to go under it would bring the world banking system down. This was because AIG had transformed itself from a boring insurance company into one at the vanguard of the new credit default swap market. AIG was in the business of insuring leveraged debt just at the time when the financial system was on a precipice.

Bernanke knew that, unlike Lehman Brothers, he could not let AIG fail. He announced an $85bn (£46bn) emergency loan. It would not be the last time AIG got help.

In London, by Tuesday night, it was clear that HBOS was about to become the biggest UK victim of the financial crisis. Journalists became aware that both Lloyds and HSBC were prepared to step in.

On Wednesday morning, Gordon Brown became concerned that savers in HBOS would be spooked by relentlessly negative headlines. He asked the FSA to put out a statement saying that the former building society was 'well capitalised'. Minutes later BBC reporter Robert Peston pushed out the story that Lloyds was buying HBOS. On Thursday, a shattered-looking Andy Hornby, the HBOS chief executive announced the deal with his Lloyds counterpart.

For now, attention swung back to Wall Street. Rumours circulated that Goldman Sachs might be in trouble. So worried did regulators become that they slapped a temporary ban on short-selling of financial stocks to prevent shares falling further.

The week ended with Hank Paulson unveiling an audacious plan to inject hundreds of billions of dollars of taxpayers' money to buy up toxic assets.

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Week three: 5-11 October

On Sunday, German chancellor Angela Merkel got the week off to an acrimonious start by promising to guarantee the accounts of all her countrymen's savers, destroying efforts to build a European concensus on a rescue strategy.

The next day, more than £90bn was wiped off the value of Britain's companies in the City's worst day of trading since Black Monday in 1987. Gordon Brown promised to do 'whatever it takes' to halt the panic. But that was only the start of a nerve-shattering week, in which the world's financial system came closer to absolute collapse than at any time since the 1930s.

Businesses up and down the country would later insist that in October, everything, 'fell off a cliff'; and this was the week it began. For Brown, it started with the first meeting of his National Economic Council - a gathering of senior ministers, styled as a war cabinet for the credit crunch. But not far away in the City, as rumours swirled around of an emergency taxpayer-backed rescue for Britain's battered banks, shares were plunging, losing almost 8 per cent of their value by the time the markets had closed.

A month after the ignominious collapse of Lehman Brothers, investors remained gripped by stomach-churning vertigo: the bankruptcy of the Wall Street giant forced traders everywhere to think the unthinkable - no firm, however venerable, was too good to fail.

In fact, plans for a bail-out were still sketchy; but the markets impose a timetable all of their own, and as the sell-off intensified, Treasury officials worked late into the night in Whitehall to fill in the details.

Britain was far from alone in grappling with financial panic. Thousands of miles away in Reykjavik, the Icelandic government was rushing through an emergency bill to take control of its collapsing banks, and sending out feelers to the International Monetary Fund about a potential emergency loan, as the credit crunch plunged the overheated Icelandic economy deep into the red.

By Wednesday, Brown and Alistair Darling were ready to announce their £50bn bank bail-out. The day began with a 5am crisis meeting at Number 11 Downing Street to put the final touches to the 'recapitalisation' that Brown would then urge the rest of the world to emulate. At 19 minutes to 12, as Brown prepared for his first prime minister's questions since parliament's summer recess, his phone rang: it was Mervyn King, informing the prime minister that interest rates would be cut by half a percentage point, at noon, in a move co-ordinated with central banks around the world.

Like Brown, King had at times seemed caught on the back foot by the mounting financial and economic crisis of the summer and early autumn; but the Bank, too, was now ready to gallop into action. For Britain's borrowers, it marked the beginning of an unprecedented period of reductions, bringing rates down to 2 per cent, with another cutting spree expected in the New Year. The scale of October's internationally co-ordinated cut was unprecedented; but still the markets plunged.

Across the Atlantic, Hank Paulson, who was now in charge of America's response to the crisis, was desperately attempting to reassure millions of anxious voters that their savings were safe, in the face of scepticism from the financial markets about his $700bn 'Troubled Asset Relief Programme,' aimed at using taxpayers' cash to buy up toxic assets from endangered Wall Street institutions.

Also on Wednesday, the IMF kicked off its annual meeting in Washington with a warning that the world economy faced a painfully tough year. The next day, Dominique Strauss-Kahn, the IMF's managing director, said he had prepared a $200bn war chest to lend to governments driven to financial crisis by the crunch, and could make cash available to struggling countries within a fortnight.

By Friday, as haggard-looking finance ministers from the G7 club of wealthy nations flew to Washington, the world's financial system was on the brink of disaster. Communiques from G7 finance ministers' meetings are usually several waffly pages long, with the pet subjects of different member-countries covered in carefully diplomatic language; but this time, they knew they had to offer some reassurance to a petrified financial world.

Japanese delegates spoke with passion about their own 'lost decade' of debt and recession in the 1990s, and urged their counterparts from around the world to sign up for radical action. So keen was King for the finance ministers to deliver a clear message that he called on Elvis Presley, urging them to take, in the immortal words of the King, 'a little less conversation, a little more action'.

As if to underline the gravity of their task, the Dow Jones index hurtled an extraordinary 700 points down in early trading, then swung up into positive territory, to end up 'only' 128 points down on the day.

In between discussions at the US Treasury, chaired by the increasingly beleaguered Paulson, Alistair Darling was firming up the details of which banks would take how much from the Treasury's bail-out; and negotiating with the Icelandic government about the return of UK consumers' deposits in the banking sector.

The first draft of the G7 statement, produced by civil servants in the usual way, was ripped up and chucked out. Instead, finance ministers signed up to a pithy list of bullet points, pledging to unleash all the policy weapons at their disposal against the crisis. They promised to prop up banks with taxpayers' money where necessary, and use public funds to thaw out the frozen credit markets, and unblock the flow of much-needed cash to families and firms.

Frantic markets were reassured, at least at first, of the politicians' determination not to allow the crash of 2008 to bring the global financial system grinding to a halt. But after a week staring into the abyss, weary politicians knew they still faced a long, tough battle to prevent the world lurching into a new Great Depression.

HS