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Kai Ryssdal: If you take a look around Wall Street today, it doesn't seem all that different from a year ago. Bankers and traders, and the stock and bond markets still dominate the lower end of Manhattan. Capitalism, fundamentally, still works.

But last fall, incredible things happened. The government spent hundreds of billions of dollars bailing out the financial industry. But even though Washington had rescued Bear Stearns and Fannie Mae and Freddie Mac, a year ago this coming Tuesday it drew the line at Lehman Brothers. How Lehman went broke was -- and is -- a big and important story. Why it happened is more important.

GILLIAN Tett: At the end of the day, finance is all about faith. Money does not exist unless you believe in it. Otherwise, it's just a bit of paper.

Gillian Tett covered the credit crisis for The Financial Times. She turned that work into a book called "Fool's Gold," about the idea that as strong and secure as our financial system appears, it's really only as safe as our belief in it.

For years, most of us did believe -- until last fall, when we couldn't anymore.

Kids: Hey, Mama Hill. Hey, Mama Hill.

Millicent Hill, Mama Hill to the kids and almost everybody else, runs an after-school program out of her house in south Los Angeles. She's a small woman. But she's a commanding presence.

She sits in the middle of a room crowded with books and school papers, greeting each of the kids as they come in.

Kids: Hi Mama Hill.

Mama Hill: Hi.

Most afternoons you can find a child or 10 working on their lessons spread out all over that house.

Mama Hill: This is their house. And this is my bedroom right there. That's all I have. I don't have any other place to live.

Mama is serious about her kids. That's how the trouble started. Four years ago, the city of Los Angeles cut her program out of the budget. So she did the only thing she could think of. She looked into a home-equity loan to keep the program alive.

Mama Hill: The advertisement said 4.2 interest rate. Easy Funding. Two-week funding. Call us.

So, she called.

Kids figure pretty big in John Chrin's life now, too. College kids. Chrin left Wall Street this past June. At the end he was running mergers and acquisitions for JPMorgan Chase, an interesting place to be last year about this time. Now he's out of bankers' pinstripes and into khakis and a button down. Teaching at the business school at Lehigh University.

JOHN CHRIN: I'll be teaching an introduction to business class one section, and then an upper level finance elective, an M&A, which is what I practiced for 20 years on Wall Street.

About the same time that Mama Hill was taking out that home-equity loan, Chrin was watching Wall Street do its version of the same thing. Bankers were taking on more and more risk, bundling and selling off mortgages, like Mama Hill's. Although Chrin couldn't really figure out how those deals made any sense.

CHRIN: When you go back and look in the 2006-2007 time period and think about the large number of mortgage transactions that took place in specifically sub-prime mortgage companies that were bought and sold predominately by Wall Street firms, I just, you couldn't understand where the valuations were coming from.

Chrin and a lot of other people figured the bankers making those deals knew what they were doing. By the end of 2006, though, there were signs of trouble down deep in the mortgage industry. Down where homeowners couldn't make their payments anymore.

For Mama Hill, the interest rate on her loan had more than doubled. So she made another call.

MAMA HILL: I called them back, maybe, just about, maybe three weeks because they said they were gonna call me. They didn't call me. I called them back, and the number was disconnected. That's number one, and I said, Uh oh.

That got her worried, a little suspicious, maybe. But she still had faith everything was going to work out. Her loan was eventually sold to New Century Financial, at the time the biggest subprime lender in the country. In April of 2007 though, New Century went into Chapter 11, a passing noted by John Chrin, in the thick of it at JPMorgan.

CHRIN: New Century, to me, that was the light switch in terms of, OK, things are not good in the system.

After New Century went bankrupt, Mama Hill's mortgage changed hands two more times. She barely knew who to pay.

MAMA HILL: Suddenly Avelo Mortgage had me. And I got a phone call from a Mr. James White. And he said you know, you're six months in arrears on your loan, and we're going to put your house up for sale.

What happened to Mama Hill was happening to people all over the country. Families were losing their homes, the number of foreclosures was going up, and yet people weren't really paying attention. The Dow was still over 12,000, and everybody -- even Ben Bernanke -- thought the problems were only in real estate anyway. Until the Federal Reserve had to help rescue Bear Stearns. JPMorgan bought Bear at a fire sale price with some help from the Fed. And John Chrin was in the room when it happened.

CHRIN: Honestly at that point, I didn't believe, and I think anybody tells you that they did predict what was going to happen over the next six months, really was full of it. No idea that was going to take place.

But it did happen. Lehman collapsed. AIG, Washington Mutual, Merrill Lynch -- the list goes on. All of 'em got into trouble. And it caught almost everybody unaware. Everybody who for years had had a deep, but basically irrational, belief in the financial system. A belief that house prices and stocks and retirement accounts would keep going up. That a 25 percent annual gain in the value of your home was normal.

Columbia University psychologist Elke Weber specializes in financial decision making. What's going on inside our minds when we think about money.

ELKE WEBER: Even experts are very much driven by their emotions and by sort of recent experiences. And if investors who in their 30s, or even 20s, have never seen times when markets do tank, it's somewhat human nature to just assume that these trends will continue. It's not rational. But it's understandable.

MAMA HILL: We're so comfortable, we have no reason not to believe. Think about it. We haven't had anything too devastating within the few years to make us not believe that it would work out OK.

A lot of people who worked on Wall Street trading those mortgage-backed securities felt just as comfortable as Mama Hill did. Most of them had never seen a real bear market, much less an outright collapse. So they had no reason to believe everything wouldn't turn out all right.

And even when the cracks did start to show, author Gillian Tett points out that their belief only became stronger. Because their jobs depended on it.

TETT: If you are a salesman working at a bank every single instinct you have is to try and convince people that the future will be bright. You have to be optimistic for a living.

Optimistic not just for a living, says Elke Weber, but for survival.

WEBER: Too much worry can be dysfunctional, and so I think there is something quite adaptive about being too confident and sometimes over-confident in the success of our ventures.

Confident is good, blind faith is bad. And that, in very large measure, is what got us to Bear Stearns and then Lehman Brothers. Once we realized what a house of cards we had built, we all wanted out. In a hurry.

At the University of Chicago's Booth School of Business, economist Luigi Zingales runs a survey. It's called the Financial Trust Index. It's a measurement of how much faith we have in the banking system.

LUIGI ZINGALES: Clearly banks are fragile institutions because they rely heavily on the trust of the public. We know, and I think that even the large public knows if they've seen "It's a Wonderful Life," that if everybody run on the bank, the bank cannot pay back everybody at the same time.

Even though most of us have federal deposit insurance, after Lehman we just didn't trust it anymore. People actually pulled their money out of banks, and stuffed the cash under their mattresses. Our retirement savings were cut in half. We didn't trust banks, Congress, the president, or the bailouts. We didn't trust anything. For Mama Hill, what had happened was pretty simple.

MAMA HILL: It was like somebody just came and knocked all those dominoes, which would be little people like us, out from under there. And then everybody crashed. Because we're the fiber. And then we were gone.

Luigi Zingales did another survey a couple of months ago. Faith in the financial system is rising again.

ZINGALES: The banking sector is a crucial engine of our system.

Provided we keep our eyes open.

ZINGALES: When you invest in a bond, or when you invest in the stock market, you are taking some risk, or investing in a house for that matter. And you should be well aware that prices can go up or can go down.

And you have to believe that the whole financial system is going to work. Gillian Tett from the Financial Times:

TETT: To rebuild trust in finance, you need to start rebuilding a sense that consumers of finance know what they are getting and can believe in both the products and the people peddling those products. That will require a demonstration that some of the financiers actually understood what went wrong last time and are trying to put things right now.

John Chrin gets that. And if his students in that Introduction to Business class he's teaching this semester want to work on Wall Street, he'll help 'em get there. But he hopes things will be different by the time they do.

CHRIN: Shame on us as a country, if we don't walk out of this with a 21st century infrastructure to manage the financial institutions going forward. And to me, if we walk away with that, then as painful as this was, it would have been worth it.

Mama Hill eventually got her house back. In a way. Two members of a local church bought that house. She rents it now. And even though her faith in banks and banking is pretty much gone, she knows she's going to jump back in eventually

MAMA HILL: I am really learning a lot of things about the finances. I'm learning how to manipulate it, because that has to be done. You know that, we have to manipulate it. I am learning all the terms. So I want to do some things, I want to do some corporate things. I need to have some businesses to start in the community so the children can have jobs. So I'm going to have to be a business lady. I'm going to have to get back into the quote "financial system."

That's a knowing laugh, from a 69-year-old woman who's figured out the answer to a question a lot of us probably have after the fear and losses of last fall: Should we get back into the financial system? Should we start trusting it again. We will, if only because we have to. Because otherwise a dollar really is just a piece of paper.