The Birthday Party.(Blackstone Group's Stephen A. Schwarzman)

On June 18, 2007, Stephen A. Schwarzman, the chairman and chief executive of the Blackstone Group, and his driver approached the Fifth Avenue entrance of the New York Public Library. Schwarzman, a member of the library's board, was being honored that night. To his dismay, television reporters and cameramen were milling on the steps and the sidewalk. He evaded them by using a side entrance. A TV cameraman managed to penetrate the cocktail party that preceded the ceremony, and Schwarzman was startled when the glare of a camera-mounted spotlight hit him in the face.

In the previous few weeks, he had become the designated villain of an era on Wall Street--an era of rapacious capitalists and heedless self-indulgence that had driven the Dow Jones Industrial Average to new highs, along with the prices of luxury real estate and contemporary art, while the incomes of ordinary Americans stagnated or fell. Blackstone, the partnership that Schwarzman founded, in 1985, with Peter G. Peterson, Secretary of Commerce under Richard Nixon and a former chairman and C.E.O. of Lehman Brothers, was a new type of financial institution: a manager of so-called alternative assets, such as private-equity, real-estate, and hedge funds--esoteric vehicles that barely existed when Blackstone began but now accounted for trillions in assets. Most of the investments came from corporate and public pension funds, endowments of universities and other nonprofit institutions, insurance companies, and rich people. Blackstone was the world's largest manager of these alternative assets, with $88 billion. Its investors included Dartmouth College, Indiana University, the University of Texas, the University of Illinois, Memorial Sloan-Kettering Cancer Center, and the Ohio Public Employee Retirement System. It had taken control of a hundred and twelve companies, with a combined value of nearly $200 billion. It had just completed what was at the time the largest private-equity buyout ever, the purchase, for $39 billion, of Equity Office Properties, and was on the verge of acquiring Hilton Hotels.

Blackstone was also about to become the largest private-equity firm to offer shares to the public. A week before the library tribute, the company disclosed, as required by the Securities and Exchange Commission, that Schwarzman would receive $677.2 million in cash from the public offering and that he would retain shares worth an estimated $7.8 billion, making him one of the richest men in the country. Coming soon after the lavish and widely chronicled sixtieth-birthday party that Schwarzman had given himself in February, an unflattering profile on the front page of the Wall Street Journal, and strident calls from Congress to raise taxes on private-equity funds like Blackstone's, the disclosures could only tarnish the public offering.

Nevertheless, investors were eager to buy shares. On June 21st, a heavily oversubscribed public offering was priced at thirty-one dollars a share, at the top of the projected range, causing Blackstone to be valued at $31 billion--not far behind the venerable Lehman Brothers. The next day, Blackstone shares, trading under the symbol BX, opened at $36.45 and closed slightly lower, at $35.06. Schwarzman's friend James B. (Jimmy) Lee, Jr., a vice-chairman at J. P. Morgan Chase, sent him a congratulatory e-mail:

You were like Indiana Jones over the last few weeks. . . . They rolled giant boulders at you . . . fired poison darts at you . . . threw you into that giant snake pit . . . and yet you still found the grail, and got the blonde. . . . Bravo.

Schwarzman had demonstrated extraordinary timing. Just days before, two Bear Stearns hedge funds holding mortgage-backed securities collapsed--the first tremors of what became a full-blown credit crisis. By the end of the year, major financial institutions had recorded losses on mortgages and related financial instruments of more than a hundred billion dollars. The chiefs of Merrill Lynch and Citigroup lost their jobs. Citigroup, Merrill, Bear Stearns, Morgan Stanley, and UBS turned in near-desperation to sovereign wealth funds (funds held by governments) and rich investors in the Middle East and Asia for capital infusions.

In this chaotic environment, Blackstone had managed to avoid nearly all the pitfalls of subprime mortgages and mortgage-backed securities. It specializes in commercial, not residential, real estate. Indeed, its hedge funds are designed to profit from market turmoil, and the enormous assets that it manages deliver steady fees in good markets and bad. The stock peaked on its first day of trading, however; by mid-January, its value had been cut almost in half.