How a company staved off financial doom.

Enter John Thain.

When Thain arrived at Merrill, he did what almost every incoming CEO does: flushed the memory of his predecessor with another massive write-off. Thain also raised billions of dollars of new capital to replace the money O'Neal's mortgage-gambling operation had lost. When he finished with this housecleaning, Thain pronounced his new firm in solid shape. And, for a few minutes, it was.

Over the next few quarters, however, as the real-estate and credit markets slid toward the worst financial crisis since the Great Depression, the value of Merrill's assets continued to deteriorate. Soon analysts began to clamor that Thain hadn't done enough, that the firm needed to take more write-offs and raise more capital.

The same thing, of course, was happening across the entire financial-services industry. Thain, in other words, had been dealt a tough hand, but, unlike his compatriots at Bear, Lehman, Fannie, Freddie, and other firms, he played it well. Specifically, instead of blaming skeptics and short-sellers for Merrill's sagging stock price, Thain focused on strengthening the firm's balance sheet. Several times over the next few quarters, he swallowed his pride, took more enormous write-offs, and raised even more capital.

Over at Lehman, meanwhile, CEO Dick Fuld was dealing with the same problems and implementing the same solutions—but always a step behind.

Unlike Thain, Fuld hadn't been brought in to fix Lehman—he had built it. So, making the aggressive "de-risking" moves Thain was making would have meant dismantling his own aggressive growth and leverage strategy. It's unclear whether it was a reluctance to own up to his own mistakes that doomed Fuld or just a failure to recognize how rapidly the markets were deteriorating. Regardless, toward the end of last week, when Fuld finally realized how far up a creek he and Lehman were, it was too late.