With the decline in buyout deals, Blackstone and other private equity firms that rely on associated fees started slipping as well. Blackstone went partly public in June 2007, in a mind-bendingly complicated arrangement in which the firm’s principals got to maintain control, reap a mint from the initial public offering, and keep the performance of its individual assets private. Since then, things have dropped off steadily. Blackstone reported losses in two of its first three quarters, and its stock, which debuted at about $35, recently languished near $16. Schwarzman has seen his own stake fall by about $4 billion.

The hotel industry, which achieved record revenues in 2007, has also soured, from Phoenix to Phuket. Kristin Knox, a former Hilton employee now at Hotel Asset Value Enhancement, in California, sums up the “consensus” on the purchase: “Overvalued, and it happened at the wrong time for them.”

After Blackstone bought Hilton, it went whole hog, poaching a team of blue-chip hotel executives and mounting an expansion jag just as the industry—which historically mirrors the economy—was about to descend into what may be the worst slump in recent memory. Hilton has about 1,000 new hotels in various stages of development, including about 860 slated to be built in the U.S., mostly in suburbs and office parks. While relatively few projects are in the works in foreign markets, where Hilton’s competitors have pulled way ahead, more are on the way. Hilton is aiming to build 75 hotels in India, 20 in China, 150 in the Caribbean and Latin America, 10 in Nigeria, 30 Hampton Inns in Britain, and 25 midrange Hilton Garden Inns in Turkey.

Hilton’s growth will rely heavily on franchisees and real estate investment trusts. They put together the financing to buy or build the hotels and either pay Hilton license fees of between 8 and 10 percent of room, food, and drink revenues—in order to take advantage of Hilton’s name, branding operations, and reservations system—or pay more to have Hilton itself manage the properties. This approach ensures that Hilton doesn’t bear the cost of building the hotels, but it does leave the independent owners and franchisees at the mercy of the deepening commercial-lending freeze. Lodging Econometrics, which tracks industry growth trends, estimates that 360 U.S. hotel projects were called off in the third quarter of 2008, a seven-year high, and says some of Hilton’s have been affected.

Even assuming Hilton’s hotels are built as planned, they will probably have to cope with significant vacancies, at least for a time, as worldwide business travel contracts. “We’re in for a long global recession,” says an executive at another major private equity firm, “and Hilton needs to expand in a way that hotels have never expanded before just to get back to zero, to get back to what Blackstone paid. This is definitely a bull-market play, and we’re not in a bull market.”

Hilton’s new chief executive, Chris Nassetta, insists that financing has been secured for all the hotels under construction, mostly from local and regional banks before commercial lending soured. He says that the credit crunch is going to have “some impact” on near-term plans—chiefly on the next round of new hotels, as developers strain to find financing—but not enough to derail the long-term strategy. He predicts that the hotel-industry slump and the chaos roiling the financial markets will be reversed quickly enough. “What’s going on with globalization and the emerging markets and the growth of the middle classes,” he says, “is a very powerful megatrend that bodes extraordinarily well for our business.”

Jon Gray, the 38-year-old co-head of Blackstone’s real estate division, also defends the Hilton acquisition. Gray, who led the high-wire E.O.P. deal, reports to Schwarzman and Blackstone president and chief operating officer Tony James. He pushed for the Hilton deal and handled the negotiations. (According to Blackstone insiders, Schwarzman approved the acquisition and kept abreast of discussions but didn’t personally work on it.) “We’ve bought nine public lodging companies in the past 10 years, and in each transaction, people have told us we overpaid,” Gray said at a June conference held at the now-Blackstone-owned Waldorf-Astoria in Manhattan. “So far, we’ve done okay.”

Discussing Hilton’s growth potential, Gray threw out the word amazing like confetti from a rooftop, a sharp counterpoint to the gloom peddled by everyone else at the conference. “The greatest opportunities,” he said, “are when you’re prepared to step in when other people are running away.”