The Hampton Inn in Phoenix, an unprepossessing stucco structure set amid the haphazard low-density sprawl of South 48th Street, is unusually quiet. So much so that the owners of the midrange business hotel, which operates under the Hilton Hotels umbrella, have come in to discuss how to handle the steep drop-off in guests. General manager Gary Bowers, a burly guy with a gravelly Southwestern twang and a salt-and-pepper goatee, tells me business was great in 2007, as it was throughout the industry.

But over the summer, as the economy threatened to implode, executives and tourists alike began tightening travel budgets, and hotel occupancy in the U.S. was down by around 3 percent. In Phoenix, that number was more than 9 percent. In Bowers’ hotel, it was closer to 12 percent. “It just seemed like it came real fast, just—boom,” he says.

The struggling Hampton Inn is only one small corner in the sprawling empire of the world’s largest hotelier—none other than Stephen Schwarzman, co-founder and now chairman and C.E.O. of the Blackstone Group, the private equity giant. With its single biggest equity investment, its $26 billion acquisition in October 2007 of Hilton, which includes brands from Hampton Inn to the Waldorf-Astoria Collection, Blackstone controls nearly 4,000 hotels with more than 620,000 rooms. Now, in light of the hotel industry’s traditional vulnerability to recession, those holdings look increasingly dicey. (Editor's note: Since this story went to press, the Hilton deal hit further snags. Read our update here.)

The biggest hotel buy of all time, the Blackstone-Hilton deal stands as the apogee of the early-millennial megabuyout frenzy, where cheap and readily available credit, coupled with a relentless one-upmanship, spurred private equity firms to buy out companies at often absurd overvaluations, saddle them with massive debt, and then pay themselves hefty fees for the trouble.

For better or worse, private equity during the boom came to be almost synonymous with Schwarzman, a man known equally for his vaunted financial wizardry and his unabashed displays of wealth, most notably his notorious 60th birthday party, which cost $3 million and featured Rod Stewart and a gospel choir. A prodigy, Schwarzman had risen to managing director at Lehman Brothers by the age of 31 and co-founded Blackstone in 1985 to catch the coming wave of alternative assets like hedge funds and private equity. After a string of increasingly stunning deals, Blackstone pulled off the biggest real estate buy in history in 2007, acquiring Sam Zell’s Equity Office Properties Trust for $39 billion—a price so high that Blackstone unloaded $27 billion worth of E.O.P. assets to pay off the $16 billion debt.

Schwarzman’s high profile and profligate lifestyle—his numerous mansions and his much-derided fondness for $400 crabs for lunch—drew a backlash from the media and Congress, resulting in an ongoing legislative push to double taxes on private equity firms (an effort unofficially dubbed “the Blackstone Bill”). As the scrutiny intensified, Schwarzman began to remake his image from hyperaggressive dealmaker to world-class philanthropist, an effort that culminated in his giving in March $100 million to the New York Public Library, which, by way of thanks, will name its main building after him.

Blackstone-Hilton was the last big deal of this noisy bonanza, the collision point of leveraged-buyout fever and the hyperinflated real estate market. Blackstone’s payment for Hilton—a 40 percent premium over its share price—floated on a raft of $20 billion of the sort of cheap and flexible debt that helped spur the global liquidity crisis. At the time, Hilton was the world’s fourth-largest hotel company, and it brought to Blackstone about 3,000 hotels, spread throughout 80 countries.

When the deal happened, it was hailed as a harbinger. There was talk of other big hotels possibly selling to private equity at valuations that now look ridiculous. The share prices of Hilton’s then-flourishing rivals, Marriott, InterContinental, and Starwood, all shot up at the possibility. But none sold, and those stocks have since gone through the floor along with Blackstone’s. And as several disturbing trends collide—the burst real estate bubble, the frozen credit markets, tanking stocks—something as simple as empty rooms in places like Phoenix could determine Schwarzman’s legacy, whether he will be immortalized for his financial acumen or instead come to personify the excesses of a bloated, bygone era.

Blackstone didn’t fly blindly into the Hilton deal. It was already heavily into hotels, having spent $17 billion in the three previous years, and it controlled 100,000 rooms, spread amid such holdings as La Quinta Inns and Blackstone’s own luxury LXR line, a portfolio of once-rundown, exotically located hotels that it bought and restored. But even for a firm that maintains a formidable in-house real estate unit and nine separate real estate funds, and has a proven track record in smaller hotel transactions, Hilton was an unusually big meal.

After the Hilton acquisition, many observers expected Blackstone to do what it usually did: start spinning off assets to pay down the debt. Whether the company planned from the outset to keep all the hotels—it says it did—it has little choice now. Shortly after Blackstone and Hilton agreed to terms, the subprime debacle led to the credit markets freezing up, bringing the mega-L.B.O. era to a halt. The market is so sluggish that much of the $20 billion in debt associated with the Hilton deal, which in better days would have been moved with relative ease, remains unsold. J.P. Morgan inherited the debt from Bear Stearns, which helped finance the deal. One Morgan insider believes that the federal government—and thus taxpayers—may have assumed the debt during Morgan’s takeover of Bear.