NEW YORK (Fortune) -- When Erin Callan, Lehman Brothers' onetime golden girl, left the firm in July, it was a tumultuous end to what had been a stellar 13-year run. She'd risen from tax lawyer to investment banker to a six-month stint as CFO - and was then thrown under the bus by her mentor, CEO Dick Fuld, as Lehman's share price tanked and rumors swirled about the firm's imminent demise.

Now that Lehman has gone splat, its shareholders have been wiped out, and the whole investment-bank model has been wiped away, the 42-year-old Callan knows she dodged a bullet. A few months before the house of Fuld filed for bankruptcy, she took a new job at Credit Suisse (CS) as head of the firm's global hedge fund business. Speaking to Fortune just four days after Lehman filed Chapter 11, and at times choking up, Callan held forth on the fall of Wall Street, the rise of hedge funds and the dangers of celebrity.

Did you see the Lehman bankruptcy coming?

Nobody thought this was a possibility. In other downturns, market conditions improved. The firm had a history of coming out on the other side and doing well. But the harsh reality of this environment is that asset prices were declining at a shockingly fast pace, so the firm ran out of time. Raising money to address declining prices wasn't going to work.

What were the problem assets?

The commercial real estate portfolio really was the albatross of the firm. Organizations have to balance market volatility with a belief that the portfolio is worth its par value in the long run. The lesson, which is something every good trader or anybody who's in the risk business knows, is to cut your losses. It's hard to do that if you think the endgame should be different, but sometimes the market tells you it's time. Perhaps John Thain was able to cut his losses at Merrill (MER, Fortune 500) because he wasn't emotionally attached. He had analytical distance.

Did Lehman think the Fed would help it?

Yes. No one knew what it looked like for a broker-dealer this big and connected to the world economy to go bankrupt. And no one wanted to know.

Is this the worst storm you've seen on Wall Street?

Certainly, and there are a lot of people who have been in the business longer than me who have never seen anything like it. That tells you something about the significance of what's happening now. The phenomenon of the independent investment bank falling by the wayside is shocking. We thought the model would be challenged in the context of this environment, but it was about producing a 20% return on equity vs. a 10% return. The question was not "Can this model continue to be part of the fabric of Wall Street?"

How could the Street have been so blind?

People have long asked when the crisis would end; and until recently it hasn't been okay for market participants to say 'I don't know.' The challenge in financial services when you have to answer that question is that you are in a confidence-based business. There is a fine line between expressing confidence in a business and highlighting its weaknesses.

The question about why within a day a bank's borrowing cost could double; that's the heart of the matter. It's not that somebody decides overnight that a bank is twice as risky. They wonder if their entire view was misplaced. They wonder whether these types of organizations without deposit bases should borrow at these kinds of rates. That worry stems from a lack of confidence in the institution.

Were you forced out as CFO?

No. It was clear in the 24 hours after we announced second-quarter earnings that the market reaction was just terrible, and there was a rising sense in the organization that a management change was needed. I went back to my office and decided I was willing to step down. I'd only been CFO for six months and hadn't brought us to that moment, but I was the public face of the firm, and we had to show the world that we were making changes. Joe Gregory [then Lehman's COO and president] was thinking about stepping down, but he was not known to the outside world. It would have mattered a lot internally, but I didn't think it would have a big impact on the market. So we decided to do it together - to do the right thing for the organization.

In retrospect I was lucky to get out, but I was so sad. It wasn't a relief at the time. I never thought I would leave that firm. It had such a strong culture. People really lived their lives there. I think Dick felt personally horrible about it because I was his prot�g�e. During this difficult conversation with me, he cried.

What mistakes did you make?

You can't be naive about the press. I had a lot of positive exposure but didn't recognize the opportunity for significant negative exposure. Exposure becomes celebrity, and you get a persona. That persona got away from me and the firm. There were so many pieces to it, not least of which was the phenomenon of a woman CFO on Wall Street. Also, you find out that just because you're the CFO you don't get to make unilateral decisions.

But as CFO you're steward of the cash.

But you're not. There are all these other people in the room making decisions. To sell an asset you need the CEO, the president, and the president of that division to all sign off. I think I could have had a bigger voice had I been in my position longer, but I had been there only a matter of months.

What about your relationships with hedge funds? Part of your Lehman legacy is your battle with David Einhorn of Greenlight Capital, who was shorting your stock.

Einhorn and I had one half-hour conversation. I never thought about it again, talked to anybody about it again, knew it was a mistake. The firm asked me to do it. Even though I thought we shouldn't, I did because I was working within a team.

Our job was to work one-on-one with our clients and shareholders to address questions they had based on issues that he raised. But the firm found it difficult to ignore the public dialog he started. Einhorn actually never said anything that was outright false. He had an opinion about lots of things. And he was entitled to his opinion.

Do your clients worry about you because of the flap with Einhorn?

No. They know I'm not part of the campaign against short-sellers. I believe in efficient capital markets. People should make long decisions and short decisions, and they have their investment theses.

What does the future hold for hedge funds?

Big funds will become very large money managers with whole suites of alternative investment products - hedge funds and private equity funds to more traditional long-only investments. Firms that offer all the different assets are likely to be the winners.

Will big players like Fortress, Citadel, and Blackstone (BX) fill the investment-banking void?

I see firms like these easily stepping into some of this void. They're constrained only by their imaginations, and there are a lot of creative people in that community. Some firms are already acting as market makers, lenders, and advisors. But the hedge fund community faces the same issues that brought the Street to its knees: the availability of financing, the proper asset-liability structure of its balance sheet, the ability to raise capital from investors, and the ability to deploy it safely and efficiently over various horizons. Whether you're buy side, sell side - whatever way you're participating in these markets - everyone is being cautious.