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11, the price of Lehman's credit-default swaps--the cost to protect against losses on $10

million of its debt for five years--had soared to $800,000 a year, from $219,000 at the end

of May. Clients began calling and emailing Lehman to get their money out. Lehman

scrambled to comply so as not to betray weakness."

JPMorgan Chase was worried about holding lending positions with Lehman if the firm

collapsed. For the past week, Morgan had been advancing collateralized lending to the

tune of at least $100 billion a day, so that Lehman could stay in business. By the night of

September 11, though, Morgan froze $17 billion of Lehman's cash and securities. Jane

Buyers Russo, head of JPMorgan's broker-dealer unit, phoned Lehman's treasurer, Paolo

Tonucci. She told him that Lehman would have to turn over the $5 billion in collateral

that Morgan had asked for days earlier. The amount was big enough to temporarily freeze

Lehman's computerized trading systems; it nearly broke the firm's trading arm.

A run on the bank had begun, and there was nothing Fuld or McDade could do to stop it.

Once Wall Street CEOs heard that Dimon was asking for more collateral, they started

calling each other--and the government--to get a sense of how badly they would be hit if

Lehman went down.

By Thursday afternoon, Bank of America CEO Ken Lewis had soured on Lehman.

Earlier in the week, Bank of America had come to Christopher Flowers, whose private

equity firm J. C. Flowers & Company was always on the hunt for failing banks, and

asked him to partner on the deal. Flowers, a math genius, had spent 24 hours poring over

Lehman's books with a team from Bank of America and found the firm's $32 billion

portfolio of commercial real estate assets highly questionable--to say nothing of

Lehman's exposure to residential mortgages. The team didn't value the firm at anything

close to Lehman's self-valuation of $600 billion.

Lewis called Paulson and said, "We've looked at it and we can't do it without government

assistance. We just can't get there." He wanted out of this deal. Instead, he wanted Merrill

Lynch.

"Tell us what you need help on, and we will come up with a way to get there," Paulson

told him.

Meanwhile, Lehman thought Bank of America was neck deep in the deal: An acquisition

by BofA made sense. Bank of America was a retail bank. Why wouldn't it want an

investment bank?

Fuld believed that by Thursday afternoon it was all but done. He mentioned to a

colleague that Lewis had even said to him Thursday night, "You know, we' re going to do

this deal." Lewis had given him his home phone number in Charlotte, North Carolina,

and signed off with "We will need to stay in touch over the weekend."

Fuld was optimistic.

Over at Lehman's offices at 745 Seventh Avenue, Steve Berkenfeld put in a

precautionary call to Stephen Dannhauser, head of Weil, Gotshal & Manges, asking him

to start preliminary work on bankruptcy papers. Dannhauser conveyed the message to

Harvey R. Miller, the country's leading bankruptcy attorney and a member of the firm.

Miller understood this was an important client (the firm's largest) and started in

immediately.

Meanwhile, sensing Lewis's nervousness, Paulson finally called Bob Diamond in London

and asked, "Are you serious? " He says Diamond told him he was. Very.

"That's what made me so optimistic--they kept saying they couldn't stand to get to the

altar and be topped by someone again," Paulson recalled.

Before Diamond left, Paulson told him, "Don't come unless you are serious."

Bob Diamond and a team got on a plane to New York.

Diamond was interested in buying Lehman--but only its U.S. assets, and at a distressed

price. Diamond and his boss, John Varley, the CEO of the parent company Barclays, had

been chewing the idea over with the Barclays board in the United Kingdom and with

their regulator, the Financial Services Authority (FSA), all summer.

"Lehman was number one in equity research for six or seven