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Long-Term Capital Management rescue 10 years before, Paulson told Geithner to

summon all the heads of Wall Street to the Federal Reserve, where he laid out the

situation.

Paulson wanted to figure out a way to save Lehman--but with the criticism over what had

happened with Fannie and Freddie still burning in his ears, Paulson was determined to do

it without spending a cent of taxpayer money.

"Remember, there was no public policy issue," Bob Steel, Paulson's erstwhile deputy,

said many months later, "so he [Paulson] had to deal with the political issue, which was:

'So let me get this straight--you're going to bail out Lehman Brothers so that the clowns

who live in mansions with long driveways can continue to send their kids to private

schools?' That's how people think."

Paulson agrees. He owns a modest house, wears socks with holes, and is a very moderate

Republican (his wife Wendy is a registered Democrat). Paulson would never suggest,

even in jest--as Lloyd Blankfein, his successor, later would--that bankers do "God's

work." Far from it.

Paulson later said, somewhat jokingly, that when he ran Goldman Sachs, "I used to say to

bankers, 'Listen, people don't like bankers, and that means you. I know your mother loves

you. If you 're lucky, your wife and your kids like you. And your clients may like you

individually. But they hate bankers. And so, why are you building these huge homes?

Why are you pulling up to a client's office in a limo? Why are you doing this? It is

harmful. It's hurting all of us.' "

Even as he landed in New York and rolled up his sleeves to get to work, Paulson was

making some key phone calls. One was to Warren Buffett. Could Buffett be the third

party to help finance Lehman's sale?

But Buffett had read Lehman's 10-K (the company's annual report filed with the SEC)

back in April and decided he wasn't interested.

Even so, Paulson went back to the Oracle of Omaha and, according to Buffett, "gave me

his thoughts. Though I'm sure he would have been pleased if I had done so, he did not

urge me to make the investment."

Paulson also called Alastair Darling, the British chancellor. How helpful were the British

going to be? Could Barclays get any backup from its government if they could get a deal

going?

The conversation was not a pleasant one. According to Paulson, Darling "was very

nervous." He knew exactly what the implications of Lehman failing would be.

Nonetheless he wasn't going to let British money backstop an American deal. It would

have been voluntarily moving the U.S. cancer overseas.

Paulson recalled that Darling said that the notion of Barclays as a buyer was "of some

concern" and he (Darling) wasn't hopeful that Barclays could pull it off. "I forgot exactly

the words he [Darling] used, but I was hopeful that maybe, you know, the British

regulators were independent," Paulson said months later.

Even so, Paulson had reportedly said to Darling: "Your regulators are asking a lot of

questions." Darling shot back: "They are right to."

Paulson now knew he was relying on Bob Diamond's zeal. Maybe the banker really could

win over his regulator. "When Barclays . . . started going through the different assets they

were going to take, it sounded pretty bad, but they were a motivated buyer," he says. "So

the deal seemed challenging--but doable."

Saturday morning, Diamond and his team entered the New York Federal Reserve at 33

Water Street, a vast lobby chockablock with lawyers, and were funneled into a room on

the fourth floor with a single piece of paper attached to the door. Scribbled on it was the

only word that seemed to matter: "Buyer." Diamond smiled.

"We realized our status had been elevated--and that BofA had gone," Diamond says. He

reviewed with Paulson and Geithner and their staffs what he and his board had agreed

would be the terms. He told them: "Rather than buy Lehman, we' re going to extract what

we want and ring-fence the private equity