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Lehman. We will put in our fee"--a source pegs this at somewhere between $3 billion and

$4 billion--"we will put in all the preferred equity, and by our math the gap in valuation is

somewhere between $10 to $15 billion to get it funded." In other words, the shortfall was

$10 billion to $15 billion.

Paulson was flabbergasted: "What!? I told you there's no government money available for

this deal!"

Diamond had more preconditions: "We have to have a guarantee to clear. And I think that

has to come from the Fed. We know that the FSA [the British regulator] doesn't have the

charter to do it, nor would they do it--we' re a UK bank, and this is a U.S. deal. So we

will look for third parties. I have very little hope that we can get a third party. . . ."

Michael Klein, one of Diamond's aides, put in a call to Buffett, who once again

demurred. "If you fax me something written out about it, when I get back, I' ll be glad to

read it," Buffett said over speakerphone to the assembled Wall Street luminaries. Then he

left with his wife to attend a gala in Edmonton, Alberta.

Treasury and Fed officials spent all of Saturday pressuring the heads of Wall Street's top

banks and securities houses, including Goldman Sachs, JPMorgan, Deutsche Bank,

Citigroup, and Credit Suisse First Boston, to come together and raise $35 billion to buy

Lehman's toxic assets so that the firm could be bought at $3 per share.

Meanwhile, Lehman's representatives--McDade, Kirk, and Shafir, along with the Sullivan

& Cromwell lawyer H. Rodgin Cohen--were led to a tiny room on the first floor of the

Fed and told to stay put. "It's like we' re in a hospital and we' re the patient," Kirk joked.

But he knew how close to the mark that remark was.

Around 4 P.M. that Saturday, as the Wall Street heads bickered about how much money,

if any, they should spend on Lehman, Geithner--according to Paulson--received a call

from the Barclays' board in London saying, "We' re going to need a shareholder vote. . .

.We have a question as to what happens with the trading book."

It was the same red flag that Alastair Darling and Diamond had raised. Even if a merger

could be agreed to, Barclays did not have the authority to fund Lehman's trading book on

Monday morning. That funding would have to come from elsewhere, presumably the

Fed.

Paulson was faced with a Sophie's choice: He could use tax dollars via the Federal

Reserve to bail out Lehman or to help it with a merger, or there could be an economic

catastrophe.

Geithner hedged on the call with Barclays, according to someone in Treasury. "Tim said,

'We' ll certainly keep working to solve it, and don't let that stand in the way. You come

up with a deal you can do, and then we' ll look at all the options.'"

Diamond recalls that Geithner had told the Barclays board to just "get a deal done, and

then we 'll deal with the funding issue." Diamond was hopeful he could work with the

Fed.

They were looking for a miracle. And to some extent, they got one.

Late Saturday night, the Wall Street CEOs agreed, with some government assistance, to

buy the toxic assets, reportedly worth around $35 billion. Paulson now believed he had

the deal done, even though the issue of funding the Lehman trading book had not been

addressed. Barclays was notified that it should go ahead and bid for a "CleanCo."

Everyone was optimistic.

Paulson, meanwhile, was hoping the FSA would come through for him.

In hindsight it appears as though neither party had quite communicated these thoughts to

the other--or if they had, that much had been lost in translation.

At around 10 A.M. on Sunday, September 14, McDade phoned Fuld, who was waiting

anxiously at Lehman's offices for news, and told him: "We have a deal." Barclays was

willing to buy the firm for $5 a share (or roughly $3.5 billion).

But then Sir Callum McCarthy, the outgoing chairman of the FSA and Hector Sants'

boss, called up Geithner, "ranting and raving," according to a source, and angrily