In Part 4 of a five-part series Yalman Onaran and John Helyar chronicle the demise of investment bank Lehman Brothers and the fall from grace of its leader Richard Fuld.

Key Points:

Why CEO Richard Fuld was unable to find a buyer for all or part of Lehman remains a matter of dispute. It was not for want of trying, although some people familiar with those efforts throughout the northern spring and summer say he was unwilling to accept the rapidly falling valuation of his firm.

"Dick was so proud of Lehman that he was slow to recognise that others didn't share that belief," said George L. Ball, chairman of Houston investment firm Sanders Morris Harris Group and a friend of Fuld's.

One obstacle, say people close to Fuld, is that he was more of an inside man. He didn't like to mingle with the Wall St elite on the black-tie circuit.

He didn't go in much for the genteel game of golf, preferring the sweaty game of squash, often on his own home court in Greenwich, Connecticut. He didn't care for public speaking.

Throughout the crisis, Fuld was too quick to blame his detractors for his own mistakes.

David Einhorn, president of Greenlight Capital, a New York hedge fund, became enemy No 1 on May 21, when he went public with his analysis that Lehman was propping up its numbers with aggressive valuations and challenged CFO Erin Callan's credibility.

The short-seller put pressure on Lehman's stock and aroused Fuld's ire. A May 26 email to Fuld from Lehman executive David Goldfarb, released by Henry Waxman's committee, suggested that the firm should use capital it was hoping to raise to buy back Lehman stock, "hurting Einhorn bad!!". Fuld's response: "I agree with all of it."

Meanwhile, the company's financial situation continued to deteriorate. The value of Lehman's residential mortgage portfolio and commercial real estate assets kept declining as the prospect of recession grew. Nobody wanted to buy into Lehman - at least not for the moment.

Even interested parties figured the price would keep coming down, as real estate valuations fell and Lehman got more desperate for cash.

The Bear Stearns precedent, in which the US Government stepped in to facilitate a deal, also gave prospective buyers a reason to wait.

Lehman sold US$16 billion ($27.6 billion), or about one-fifth, of its mortgage assets during the second quarter of 2008. Selling assets that nobody wanted meant taking significant losses.

Market volatility had also rendered many of the hedges ineffective during the quarter. That led Lehman to announce a US$2.8 billion second-quarter loss on June 9, its first since being spun off from American Express. Lehman also reported that it had raised another US$6 billion in capital from investors.

The loss led Fuld to panic, say some people who interacted with him at the time. For the first time, he started worrying that he might lose the firm. Bart McDade, 49, who as head of equities was instrumental in raising capital from trading clients, persuaded Fuld to promote him to president, ousting Joseph Gregory.

Callan was also pushed aside, replaced by Ian Lowitt, 44.

One of the first things McDade did was to bring back Michael Gelband, 49, to help him sort out the mess. He also asked investment banking chief Hugh McGee to redouble efforts to find a strategic partner who would buy a stake of at least 10 per cent.

While the firm had been in talks with potential partners in the previous three years - including Japan's Mizuho Financial Group and China's Citic Group and Ping An Insurance - they were always with the intention of co-operation in Asia, where Lehman was weaker than most of its rivals.

Now, as summer began, the stakes were higher. Talks began in July with executives at Bank of America. One Lehman proposal was to merge with the investment banking unit of its Charlotte, North Carolina, rival, which would own about 40 per cent of the new entity. While CEO Kenneth Lewis was not keen on that idea, talks continued on other possible combinations, people familiar with the discussions said.

Fuld also reached out to General Electric CEO Jeffrey Immelt, a fellow board member of the New York Fed. He said no. An overture to London-based HSBC Holdings went nowhere.

And Fuld came up empty after meeting in August with executives from Citic, China's biggest state-owned investment firm.

Only the Korea Development Bank (KDB) seemed eager to make a deal. The bank's chief executive officer, Min Euoo Sung, had run Lehman's operations in Seoul until May.

In early August, according to Lehman executives involved in the talks, KDB offered to buy 25 per cent of the firm for US$22 a share, about where the shares were trading at the time.

Then talks bogged down on issues like how much management say the Korean bank would have and how Lehman's mortgage positions should be valued.

By early September, Min was only willing to pay about US$8 a share, the executives said. "The gap in assessing the size of potential writedowns was just too big," Min said in Seoul on September 16.

Some involved with the negotiations say Fuld and McDade did not want to cede any management control and that Min grew concerned about further Lehman writedowns. Others say Min never had approval from his Government to do a deal, so he kept lowering the price to make sure it would not happen. Min told legislators in Seoul on September 18 that Lehman was unwilling to accept less than US$17.50 a share.

Meanwhile, worried that his lieutenants would not be able to fetch a fair price from an investor, Fuld was pursuing another strategy. The plan his associates devised would offload Lehman's toxic commercial mortgage portfolio to an independent company, codenamed Spinco. The new company's stock would be owned by Lehman shareholders, and its startup capital would be provided by the firm. While Lehman would have to raise fresh capital to replace what it transferred to Spinco, investors would be buying into an investment bank with a scrubbed balance sheet.

The US Securities and Exchange Commission gave the plan initial approval, Lehman executives said. There was only one hitch: it would take at least three months to meet SEC requirements. Lehman didn't have three months.

The firm's announcement of another management shuffle on September 7 hardly buoyed confidence. Jeremy Isaacs, the international operations chief and former rival of McDade, was out, as was Andrew Morton, global head of fixed income.

Isaacs had actually resigned in June, although the announcement was delayed for three months at Fuld's request. His decision to leave the firm after McDade's ascension, at a time when he could have been instrumental in negotiating a foreign deal, only served to widen the rift between the London and New York offices.

Tomorrow: With Lehman running out of cash it had to borrow money from the Fed's broker-dealer facility by Monday if it wanted to stay in business. Again the New York Fed, on whose board Fuld sat until the day before, was of no help. He was told Lehman's assets did not fit the criteria for collateral, Fed chairman Ben Bernanke would later say.