In the fall of 1988, giants walked Wall Street, causing corporate America to tremble and capturing the public imagination in best-sellers. Salomon Brothers’ John Gutfreund challenged his traders to a million-dollar hand in “Liar’s Poker.” Michael Milken trafficked in junk bonds and intrigue in “Den of Thieves.” Leveraged-buyout rivals Henry Kravis and Ted Forstmann vied to acquire RJR Nabisco in “Barbarians at the Gate.”

In the fall of 2008, Lilliputians walk what’s left of the Street. Last month, the nine biggest banks’ leaders were summoned to Washington by treasury secretary Henry Paulson, who said he had an offer they couldn’t refuse.

They would get the first chunk of a $250 billion government infusion of capital into the banking system. Uncle Sam would pay each of the assembled banks as much as $25 billion for a new class of preferred stock — and impose some onerous terms, like capping executive pay. Just sign the term sheet, Paulson said; this wasn’t negotiable. And they did.

So how did this once-proud breed manage to go from bestriding the business world to groveling in Washington? It’s a pertinent question as we near the 20th anniversary of the climax of the roaring ’80s: On Nov. 30, 1988, Kohlberg Kravis Roberts & Co. bid a record-smashing $25 billion to win the battle for RJR Nabisco.

(Full commercial disclosure: ?Barbarians at the Gate,” which I co-wrote with Bryan Burrough, has been re-issued in hardback to mark that anniversary.)

Gold paving

The road from there to here was hardly straight downhill. For long stretches, it was gloriously paved with gold. It ended “Thelma and Louise” -style, with banks plunging off a cliff, for a simple reason. Bankers refused to settle for being bankers.

The old role of Wall Street ? to advise and finance American business ? was thought to be for remnants of the white-shoe crowd. They had no imaginations, no aspirations, no places in the Hamptons. Wall Street became increasingly and fatefully a business of blue smoke and mirrors.

Say this for the stars of 1980s Wall Street, the M&A artists. They had egos the size of the Plaza, but they were grounded in reality. They had to know the business and speak the language of the Fortune 500 chief executive officers to whom they constantly peddled deal ideas. They had to know cash-flow projections and debt-coverage ratios for all the deal options they pulled from their briefcases: takeovers, spinoffs, buyouts, the works.

Spurring change

Sure, merger mania often generated more fees for bankers than benefits for their clients. Yet the wizards of 1980s Wall Street, for all their excesses and messes, actually did spur real changes in US business.

Milken’s junk bonds vastly increased financing for corporate raiders and LBO artists. Junk bonds fueled the growth of upstart companies like Turner Broadcasting System. Milken was vilified by entrenched CEOs, and with good reason. Those who pushed junk bonds, LBOs and hostile takeovers challenged a business establishment badly in need of restructuring and deossification.

By comparison, take the drivers of Wall Street’s subsequent boom eras. Analysts were the stars of the first one, circa 1997 to 2000. Morgan Stanley’s Mary Meeker and Merrill Lynch & Co.’s Henry Blodget touted the next hot Internet stocks, and investors responded by throwing money at companies that made none. Remember TheGlobe.com? The social-networking concern soared to $97 a share on the day it went public in 1998. Two years later, trading at 53 cents a share, it was delisted by Nasdaq.

Quants ascent

By then the analysts-cum-carnival barkers had faded and the Internet bubble burst. Just as Mark Twain once wrote of a suddenly collapsed run-up in silver stocks, “The wreck was complete. The bubble scarcely left a microscopic moisture behind it.”

The next boom’s stars were quants. When the Street needed a lift and a new growth engine following the 9/11 attacks and the recession of 2001, the Figure Filberts came through. They securitised subprime mortgages, which came to be traded with wild abandon. They created credit-default swaps, which inside of five years became a $60 trillion market.

These derivatives were both mathematically elegant and awfully profitable — and yet what were they? Basically, they were bets on whether homeowners and corporations would pay their debts. So let’s see: Bankers go from Masters of the Universe to carnival barkers to croupiers.

What’s worse, Wall Street casinos operated in a way unthinkable in Las Vegas. The house bet its own money! Firms risked their capital and leveraged up their balance sheets to compete in what amounted to subprime and CDS fantasy leagues. What they got — what we got — was fantasy prosperity.

Washington slept here

This bonfire of the inanities blazed with the full approval of Washington regulators. Only when things fell apart were bankers called on the carpet by Paulson. The Goldman Sachs Group Inc. chief-cum-Treasury secretary was shocked, SHOCKED, to find gambling was taking place on the premises.

How the bankers must have ground their teeth at this grating hypocrisy from one of their own. How they must have rent their fine Italian garments at reporting to assistant treasury secretary Neel Kashkari, six years removed from business school and running the federal bank bailout.

You could almost feel sympathetic to their predicament. You could almost feel rueful to see once-invincible men down a quart on hubris. But not quite.

Wall Street bankers have come by their reprobation and scorn the old-fashioned way: they earned it. Now they can only regain their old swagger and bonuses the old-fashioned way. They have to resume banking and embrace reality. They have to give up the bubble for the sustainable.

John Helyar, co-author of ?Barbarians at the Gate,” is an editor-at-large for Bloomberg News. The opinions expressed are his own