Is this going to look really bad in future interviews? If they ask why I didn't get an offer, what should I say?
As a general rule, yes, it looks pretty bad to get a no-offer. In your case, however, I think you can explain the situation in a way that will erase most of the stigma. When asked about the summer, I'd start by enthusiastically describing the work you did, and how much you liked all the attorneys, staff, etc. Then explain that the firm unexpectedly found that it would be unable to make any offers in the transactional department. At this point, whip out the fabulous LOR and encourage them to give your summer firm a call.
I'll reiterate that I think it's critical to speak positively about your summer experience - don't let any bitterness creep in to the conversation. You can express disapointment, of course, but the general theme should be that you had a great summer, got great feedback, looked forward to a long, prodcutive career there, but that unfortunately the firm had a business downturn.