Bank of America bows out

Earlier in the week, Paulson had called Ken Lewis, the CEO of Bank of America, and asked him to take one for the team by looking seriously at buying Lehman. (Some people believe that Paulson also gave his former colleagues at Goldman Sachs an early peek at the Lehman books, too.) Representatives from Bank of America flew up from its corporate headquarters in Charlotte, North Carolina and met with Lehman bankers at the midtown offices of Sullivan & Cromwell, Lehman's legal advisors.

Bank of America spent a few days reviewing Lehman's $85 billion book of commercial and residential real-estate loans. "We figured that the $85 billion in troubled loans was at least $10 billion underwater," Lewis told Fortune (see "A visit with Bank of America CEO Ken Lewis"). He doubted the value of Lehman's better assets - its investment-banking and asset-management businesses - would cover the $10 billion hole. He proposed to Paulson - in a late-night phone conversation - that the government take around $65 billion off Lehman's books. Without that level of assistance, Bank of America couldn't consider buying Lehman.

But the Bank of America proposal was beyond what the Fed or Treasury could realistically consider given the nature of the assets Lewis wanted the Fed to finance and because it was more than twice the $29 billion secured loan the Fed had made to JPMorgan to facilitate its acquisition of Bear Stearns.

When Paulson told Lewis the government wouldn't help, Lewis put his pencil down - for the moment. He did come to New York that weekend but would never become part of the meetings at the Fed.

NEXT: SATURDAY MORNING Lehman's books get scrubbed