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businesses.

But Barclays was not prepared to deal with the costs or headaches involved in laying off

most of Meissner's staff, so in a move Chris Pettit would have been proud of, Meissner

eventually took an offer for Lehman's international operations from the Japanese bank

Nomura, pointedly making sure Lehman's Asian subsidiaries were acquired as well. He

saved more than 10,000 jobs.

Meissner felt less like a victor than a hardened survivor. To make matters more

depressing, his chief legal officer, Peter Sherratt, told him that one of his legal advisers

on the Nomura deal had taken him by the hand and thanked him for "the biggest payday

in our firm's history." The lawyers, it seemed, were the real victors in this sorry mess--or

rather, the lawyers and Bob Diamond.

Shortly after the Nomura deal closed, Fuld called to congratulate Meissner, who was in

no mood to coddle "the Gorilla."

"At the end of the day, we' re all defined by our actions," Meissner told Fuld. "I think you

and a bunch of your other senior guys really behaved appallingly in all this." He felt Fuld

should have negotiated much more tenaciously with Barclays. He should have believed in

" one firm." Fuld hung up on him.

Two days later Fuld called him back: "Look, I thought about what you said. I can't really

disagree. I just want you to know I' m sorry."

Bob Diamond's first big test at the helm of Lehman Brothers came the Tuesday afternoon

after the announcement of the merger.

JPMorgan told his team it was turning over the responsibility of facilitating Lehman's line

of credit with the Fed to Barclays, a mindnumbingly complex affair involving the transfer

of tens of billions of dollars in cash to JPMorgan in exchange for tens of billions of

dollars' worth of Lehman's portfolio of securities.

As the markets seesawed in the aftermath of the filing, Diamond 's team got increasingly

jumpy about some of the securities it was getting back from JPMorgan in exchange for its

wire transfers. The result would be a $7 billion legal battle in which both Barclays and

JPMorgan would accuse the other of trying to stick them with toxic assets.

Even so, at four o'clock on Friday afternoon, September 19, Judge James Peck of the U.S.

Bankruptcy Court in the Southern District of New York approved the deal.

Almost immediately Diamond started to trim Lehman's fat.

A source says he was somewhat sickened by how rarely senior executives had flown

commercial. "There is an airport in New York and an airport in London," he noted

sarcastically.

Diamond knew that Lehman's rot was at the top.

He had also heard about the friction between London and New York--not just of the past

few days, but going back years. Since he had lived in London he knew Jeremy Isaacs

well, and he knew both the pluses and minuses of the firm he'd bought.

Diamond decided he needed to lead a cultural change for the new Barclays Capital. He

realized Fuld should never have cut himself off from the foot soldiers. So he put his

office right on the trading floor. And on his whiteboard wall is a single phrase. It reads:

ONE FIRM

Both Hank Paulson and his British counterpart, Alastair Darling, the chancellor of the

Exchequer, had known that the repercussions of Lehman going bankrupt would be bad.

Just how bad was anyone 's guess.

"I always knew that when we had a major bankruptcy, we 'd find out how the

connectivity of credit default swaps really performed under stress for the first time,"

Paulson said later. "And I didn't think it'd be good."

Credit default swaps are unregulated financial instruments that act as "insurance" against

bond defaults. In the weeks leading up to Lehman's bankruptcy, the price to buy credit

default swaps had soared, but even at the 8 or 9 cents on the dollar at which they were

trading the week before, they were still a bargain, considering Lehman bonds would trade

around 10 cents on the dollar the next month.

Paulson was worried about the lack of transparency