Ruth Porat didn’t see it coming.

The Morgan Stanley banker who thought she understood the risks to the financial system in September 2008 was advising the U.S. Treasury Department on its rescue of Fannie Mae and Freddie Mac when she got a message: Would she come back to Washington to deal with the collapse of American International Group Inc.?

“The call I got was ‘We worked on the wrong thing,’” Porat, 55, said in an interview last month at the New York headquarters of the bank where she’s now chief financial officer. That AIG “could vanish that quickly and the impact that could have throughout the country, and that nobody could see it coming, was just staggering.”

Porat’s own bank almost vanished when hedge funds, spooked by difficulties getting money out of bankrupt Lehman Brothers Holdings Inc., pulled more than $128 billion in two weeks from Morgan Stanley. To stay afloat it sold a 20 percent stake, became a bank holding company and borrowed $107.3 billion from the Federal Reserve on a single day.

Five years after Lehman Brothers sank on Sept. 15, 2008, triggering the worst financial crisis since the Great Depression, Morgan Stanley is safe enough to survive a shock that devastating, Porat said. She and Chief Executive Officer James Gorman, with prodding from regulators, led a drive to cut risk and boost capital to soften the next blow.

Not Enough

While the amount of capital at the six largest U.S. lenders has almost doubled since 2008, policy makers and some Wall Street veterans say that’s not enough. They see a system still too leveraged, complicated and interconnected to withstand a panic, and regulators ill-equipped to head one off -- the same conditions that led to the last crisis.

“We’re safer, but we’re not safe enough,” said Stefan Walter, who led global efforts to revise capital rules as general secretary of the Basel Committee on Banking Supervision.

More than 50 bankers, regulators, economists and lawmakers interviewed by Bloomberg News disagreed about what needs to be done. Some said the six biggest U.S. banks have only gotten bigger since 2007 -- a 28 percent increase in combined assets, according to data compiled by Bloomberg -- making it harder to let them fail. Others said they weren’t troubled by bigness or a system that requires government intervention every now and then, calling it an inevitable cost of financing global business.

Banks “are too big, and I think they’re going to have to be too big,” said David Komansky, CEO of Merrill Lynch & Co. from 1996 to 2002. Komansky, now a director at BlackRock Inc., the world’s largest asset manager, said he doesn’t have “the horrible distaste for government intervention.”

Catastrophic Consequences

Congressional inquiries and more than 300 books about the crisis have identified many villains: homeowners borrowing beyond their means, banks selling subprime mortgages, government-supported agencies backing the loans, Wall Street packaging them for investors, ratings firms giving seals of approval, regulators offering little objection and politicians encouraging it all to happen.

Three fundamental flaws stand out. Regulators stripped of power allowed banks to embrace too much risk and load up on toxic debt with short-term funds. Insufficient capital left them little margin for error when those assets plunged in value. A system too large, opaque and interconnected meant they couldn’t fail without catastrophic consequences for the economy.

Morgan Stanley’s Gorman, 55, summed it up in a speech in Florida in 2010, soon after taking over as CEO.

“What caused the financial crisis?” the CEO asked. “Illiquid assets, funded short-term, held by overleveraged institutions that were inadequately capitalized.”