Biggest Mistake of the Financial Crisis: Lehman Bros. Bankruptcy, by Joann Weiner, politicsdaily.com, 15 Sept 2009, describes the financial tsunami that hit the world in September and October 2008 that even wiped out a big part of Norway's government pension fund:

Starting with the September 15 Lehman bankruptcy and continuing beyond the September 19 rescue of the mutual fund industry, the U.S. government did whatever was necessary to bail out the financial industry. It spent $85 billion to keep AIG out of bankruptcy; allowed Goldman Sachs and Morgan Stanley to convert from investment banks into more traditional commercial bank holding companies, operating under far stricter Government supervision; encouraged Bank of America to purchase Merrill Lynch, and stood ready to support the entire mutual fund industry. Realizing that the crisis had crossed global lines, the U.S. added hundreds of billions to its swap lines to aid the European Central Bank and foreign central banks.
At the end of September, with hat in hand, Paulson crawled up to Congress nearly begging for a $700 billion bailout fund. Congress initially balked -- and this action sent the Dow further down -- before approving on Oct. 3 an amended bill known as the Emergency Economic Stabilization Act of 2008.
The stock market showed what it thought of this Act -- it fell 18 percent the following week. The crisis continued to spread internationally. Iceland essentially lost its banking sector. The United Kingdom essentially forced HBOS, the U.K.'s largest mortgage lender, into the Lloyds TSB Group and nationalized Bradford & Bingley, another big mortgage lender. Governments in Belgium, France, the Netherlands, Spain and Switzerland, took similar actions to save their own over-leveraged and undercapitalized banks. The Lehman bankruptcy nearly wiped out Norway's government pension fund.

To put everything into its proper context, I am reproducing the beginning of Chapter 33 "Wall Street Coup de Etat, and Banker False Flags Against America" of my Trilogy. Here, I explain how Goldman Sachs bullied the U.S. Congress and "pulled the trigger" on Lehman Brothers.
Significantly, Max Keiser, who I reproduce below, told Alex Jones that a year before the Oct 2008 collapse of Iceland, he met some Goldman Sachs executives in a bar in Iceland who told him that they were planning on deliberately taking down the Icelandic economy in about a year. (See the 22 April 2010 Alex Jones 3rd hour interview with Bill Murphy of GATA, about 40% through this interview, where Jones recounts this anecdote. Jones also described how Goldman Sachs deliberately helped certain Greek government officials hide their nation's true indebtedness to get into the EU. In April 2010 Goldman Sachs was finally brought under U.S. federal charges):

In October 2008 America’s central bank –the Federal Reserve or “Fed”—and closely allied top Wall Street investment banking houses made a shocking display of arrogance. They dictated a massive cash infusion of $700 billion from Congress.
A year later "the Hidden Hand" behind Wall Street and the Federal Reserve made a more subtle but no less shocking show of arrogance. Despite the fact that Congressman Ron Paul finally put together a Congressional majority to support making a preliminary audit of the Fed --which has never been seriously audited since its founding in 1913 --this bill nevertheless ran into a brick wall.
Getting back to the October 2008 shakedown, French 24 TV's show "Face-Off; "Wall Street: Has It Learned Its Lesson?" interviewed independent analyst Max Keiser about this shocking event:

Interviewer: Max, if I could start with you. What is it about Goldman Sachs. How does it manage to turn figures around like that?
Max Keiser: Well, Goldman Sachs are scum. I mean that is the bottom line. They have basically coopted the U.S. Government. They have coopted the Treasury Department, the Federal Reserve functionality. They have coopted the Obama administration. Barack Obama dances, you know, to Goldman Sachs. And they are really crooked and abominable in what they have done. Remember Hank Paulson held Congress hostage. Took them in the back room and said, "Give us $700 billion dollars or we are going to crash this market. He is an arsonist. He is an outlaw. And yet he is given praise --"
Interviewer: He is Treasurer and former CEO at Goldman Sachs--
Keiser: Sure, but if you go down the list they are all Goldman Sachs scum, whether it is Hank Paulson [or] Geitner who has very close ties to Goldman Sachs, and of course all these banking bonuses are paid out to all their cronies, who are Goldman Sachs scum, and America for some reason has allowed this coup de etat to take place. This silent coup de etat where Goldman Sachs and their friends now control the U.S. Government and they are manipulating prices....

At the beginning of his 29 Jan 2010 interview by CNN's Richard Quest (above), Olafur Ragnar Grimsson, the President of Iceland, explained how Iceland got thrown off the life boat by the City of London gang in October 2008:

President Olafur Ragnar Grimsson: ...[Nothing makes me] more profoundly disappointed and sad that the government of this enlightened country [the UK] should in October 2008 decide on two things; one was to employ the terrorist legislation which was created to defend against Al Qaeda and the Taliban, put my country, their government, and the entire system on the official web site, the British government web site, side by side with Al Qaeda and the Taliban. And the second thing was that Gordon Brown, in October, and Alistair Darling, went on global television, including CNN, and stated that Iceland was a bankrupt country, which was utter nonsense at its best, financial terrorism on their part at its worst. And this meant that companies all over the world who had had dealings with Iceland closed their operations down so that the British damaged our economy to a greater extent than otherwise would have been the case.
Richard Quest: So why not simply say, "Your banks would not reimburse if it was elsewhere, our banks --everyone knew the risks-- we are not paying, good morning, on you go."
Grimsson: Well there are a number of people in my country who are saying exactly that.
Quest: Why don't you do that?
Grimsson: We are saying that ordinary people, taxpayers, should not be put in a position --
Quest: Iceland is being bullied at the moment--
Grimsson: Of course we are being bullied. Of course. The British and the Dutch are using their influence within the IMF to prevent the IMF program from going forward. So we have a situation where a small nation is in fact ready to shoulder part of this burden, but does not want to be put in a corner where the very survival of its economy in the next ten years would be at stake.

We obtain another important Icelandic insider's viewpoint from the 15 Aug 2009 New York Times book review titled "The Little Economy That Couldn't" by Harry Hurt III, New York Times book about a book titled “Why Iceland? How One of the World’s Smallest Countries Became the Meltdown’s Biggest Casualty” by Asgeir Jonsson. One gets the sense that Wall Street banking houses enticed Icelanders to leverage themselves with aggressive overseas expansion. Knowing that Iceland's central bank was inadequate to bail them out in the event of a major financial storm, they misled David Oddsson and other Icelandic leaders to believe that the UK, Netherlands, and U.S. central banks would always be available as a backstop. In other words, first it was "We are your staunch longstanding NATO allies and fellow Western defenders of democracy, don't you know." Then when the storm hit, they changed the implied rules of the game, and it was "Iceland who?"

Mr. Jonsson says Iceland’s plunge was not caused by criminality or bad luck, and he makes his case with a store of insider knowledge. A native Icelander and the author of several books about Icelandic history and economics, he is head of research and chief economist at Kaupthing Bank, which as the largest bank in Iceland was a central figure in the crisis...
...In order to grow, Kaupthing bankers had to find opportunities overseas. Iceland’s central bank didn’t have the regulatory authority of the Federal Reserve of the United States. And lacking a “lender of last resort,” Mr. Jonsson says, Icelandic banks had to rely on international wholesale credit markets for financing.
Before everything fell apart, Kaupthing and rival institutions like Landsbanki and Glitnir built a financial empire worth — at least on paper — 10 times their country’s gross domestic product. The wealth of the average Icelandic family also increased.
In October 2008, just days after the fall of Lehman Brothers, the Icelandic house of cards toppled. The collapse was caused by a sudden loss of confidence by foreign financial institutions and hedge funds. Investors stampeded to sell their stakes and/or short the Icelandic krona.
Mr. Jonsson says the Federal Reserve, the European Central Bank and the Bank of England refused to rescue the Icelandic banks with emergency loans. Kaupthing, Glitnir and Landsbanki went into receivership, many nonbank Icelandic companies were effectively bankrupted and thousands of average citizens lost their life savings...
The humiliated Icelandic government ultimately accepted a $6 billion bailout package from the International Monetary Fund.
According to Mr. Jonsson, about 95 percent of the Icelandic banking system, including his employer, Kaupthing, is now under state control. ...

"The Isle That Rattled the World." by Charles Forelle, Wall Street Journal, October 8, 2008 shows us step by step how the City of London and U.S. stood back and passively allowed Iceland to slowly suffocate as it tried to manage its way through a short term liquidity squeeze to avert disaster.

...In a matter of just days starting in late September, Iceland's entire banking system failed. This account of the final days is based on documents and interviews with a dozen or so people close to the banks and the government.
Inside Glitnir's headquarters in mid-September, CEO Lárus Welding and his deputies faced a problem: The bank had issued bonds five years earlier, to pay for its expansion, that were now coming due. Glitnir had to make a payment of €600 million on Oct. 15.
Glitnir feared it didn't have the cash...
...The mid-September collapse of Lehman Brothers in New York had panicked financial firms world-wide -- bringing lending between banks to a standstill. Given Glitnir's acute need for a loan, that was very bad news.
Glitnir hoped Bayerische Landesbank would let it be late with a €150-million payment on a loan, freeing up some cash for the bond repayment. No dice. On Sept. 24, the Germans asked to be paid on time.
Mr. Welding phoned Glitnir's chairman, Thorsteinn Már Baldvinsson. "This has not been a good day," he said.
Iceland was beginning to be cut down to size.
The Krona Crumbles
Mr. Haarde, the prime minister, spent Sept. 24 in New York City at the United Nations General Assembly. The talk there was of the financial crisis then laying waste to Wall Street. Yet while Lehman Brothers had just gone bankrupt, Europe hadn't yet felt the full force.
The Icelandic delegation headed across town to Nasdaq headquarters, where Mr. Haarde, smiling for the photo op, rang the closing bell.
Back in Reykjavik, however, Iceland's own Glitnir bank was flirting with disaster. With Mr. Haarde out of town, Messrs. Welding and Baldvinsson turned for help to Mr. Oddsson, the former prime minister.
In 2005, Mr. Oddsson had moved across town to another position of power: chairman of the central bank's board of governors. The Glitnir men said they could need between €500 million and €600 million.
Mr. Oddsson didn't commit. "Let's keep in touch," he said, according to a person familiar with the matter.
There was a problem: Iceland's central bank -- which is supposed to act as a lender of last resort when banks get into a bind -- hadn't stockpiled very many euros to lend. By the middle of this year, it held just €2 billion in foreign-currency reserves. By contrast, Iceland had more than $70 billion (€49.9 billion) in debts to foreign banks.
It had plenty of kronur. But nobody wanted those...
...The evening of Sunday, Sept. 28, Mr. Oddsson summoned the top Glitnir officials. As Messrs. Welding and Baldvinsson arrived at the central-bank headquarters to learn Glitnir's fate, Mr. Welding turned to his colleague. "Do you realize," he said, "It's over."
Mr. Oddsson said the government would be willing to take a 75% stake in Glitnir for €600 million.
Monday morning, when the deal was announced, bank shares collapsed. Rating agencies knocked down the debt ratings of Glitnir, Iceland's other banks, and Iceland itself. The krona dropped like a stone.
Britons Take a Hit
...The bad news about Iceland had startled many Brits with money in Landsbanki's Icesave accounts. That weekend, they withdrew some £200 million.
Alarmed, British banking authorities told Landsbanki it had until Monday afternoon to replenish the London branch with about the same amount.
The UK Financial Services Authority declined to discuss the Icesave sequence of events...
Brief Midnight Hope
Around midnight on Sunday, there was a burst of hope. Mr. Haarde told a small crowd gathered in the lobby of Iceland's Parliament building about a new plan taking shape: Iceland's pension funds would sell some overseas investments to raise foreign currency, then let the government buy the foreign currency for kronur.
By Monday morning, that idea was dead. The pension funds weren't eager to sell assets at fire-sale prices into a global crisis.
Iceland had run out of moves.
Monday afternoon, a weary-looking Mr. Haarde addressed his countrymen. He warned that the banks' grave troubles threatened the whole island. "The Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool," he announced on television.
The solution: Iceland would seize the banks. That evening, Parliament passed a new law enabling this to happen.
The next morning, Tuesday, Oct. 7, Landsbanki was nationalized. Iceland's depositors would be protected from losses, the government said.
In the U.K., banking authorities didn't like the sound of that. British depositors had billions of pounds in Icesave -- and no one was saying anything about protecting them.
In a heated phone call, British Treasury chief Alistair Darling asked Iceland's finance minister if British depositors were getting left out in the cold. "Do I understand that you guarantee the deposits of Icelandic depositors?" Mr. Darling asked, according to a transcript published in the Icelandic press.
"Yes," replied Arní Mathiesen.
"But not the branches outside Iceland?" Mr. Darling asked.
"No," Mr. Mathiesen said, not beyond the €20,000 minimum prescribed by European regulations. Later in the call, Mr. Mathiesen said Iceland probably didn't even have enough money to meet the €20,000 minimum.
"Well," said Mr. Darling, "that is a terrible position to be in."
Mr. Darling's office didn't respond to a request for comment. In public remarks, he has recounted a version of the call that is consistent with the transcript. Mr. Mathiesen couldn't be reached.
Despite the Landsbanki debacle, executives at Kaupthing remained hopeful about survival. Kaupthing hadn't seen massive outflows from its own British deposit service (which, luckily, didn't have "Ice" in its name). And Iceland's government had agreed to give Kaupthing the €500-million loan it needed.
Working late Tuesday at the bank's headquarters -- an airy glass building with a waterfall in the atrium -- they hammered out a proposal to take over Glitnir and sell its foreign assets. Thus, two of Iceland's three banks would pull through.
Early Wednesday morning, Kaupthing's chairman was working with his bankers to try to sell some UK assets, when bad tidings flashed across his TV screen: British authorities, worried about the solvency of Kaupthing's U.K. subsidiary, had seized its assets and transferred them to the Dutch bank ING.
The seizure would trigger a cascade of defaults for Kaupthing, blows it simply couldn't survive.
The next morning, Iceland's government took over what was left of Kaupthing. Glitnir, too, was eventually brought under government control.
In Iceland, the reaction has been shame and anger. Popular targets are British Prime Minister Gordon Brown and Mr. Darling, blamed for precipitating Kaupthing's collapse. They are also reviled for using an anti-terror law to seize other Icelandic assets. Also attracting a helping of blame is Mr. Oddsson.
His spokesman declined several requests for comment.
In a brief telephone interview in October, Mr. Oddsson said Iceland's foreign-currency reserves per capita were greater than most other countries. And in a spirited October interview on Icelandic television, he said it was the banks that should have been made smaller, not the currency reserves larger.
In a November speech to an Icelandic business gathering, Mr. Oddsson rejected blame for the crisis, saying the central bank had limited supervisory authority over banks, and that he had, in fact, warned of the banks' profligacy.
Blaming Mr. Oddsson is "totally unjustified," says his friend Mr. Gissurarson, also a member of the central bank's supervisory board." The currency crisis was brought about by Gordon Brown," he says. When the U.K. seized Kaupthing's assets, that ended Iceland's best hope keep that institution alive itself.
Mr. Brown has vigorously defended Britain's moves, saying they were necessary to protect British savers after Iceland signaled it would back local depositors but not foreigners....