.....Fuld's failure to save Lehman, after rescuing it three times before, is a story about how the most indomitable man on Wall Street became addicted to leverage and intoxicated with the power it brought. It is a tale about the inability to repair a financial model wrecked by a lack of limits and transparency, a story pieced together from interviews with former Lehman executives and outsiders familiar with the firm. Isolated, surrounded by acolytes and unaware of the rivalries tearing his firm apart, Fuld was too prideful to accept the fast-eroding value of the empire he had built, too slow to cut a deal......

The more than half a million U.S. jobs lost in November were the latest in a drumbeat of dire economic data that may have been triggered by the Federal Reserve’s decision in mid-September to allow Lehman Brothers Holdings Inc. to fail, economists and bankers said.

“It’s the collapse heard around the world,” said Ellen Zentner, a senior economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “It’s probably one of the worst decisions the Fed ever made -- to save everybody else but Lehman.”

The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts.

As Lehman Brothers Holdings Inc. struggled to survive last year, as many as 32.8 million shares in the company were sold and not delivered to buyers on time as of Sept. 11, according to data compiled by the Securities and Exchange Commission and Bloomberg. That was a more than 57-fold increase over the prior year’s peak of 567,518 failed trades on July 30.

The SEC has linked such so-called fails-to-deliver to naked short selling, a strategy that can be used to manipulate markets. A fail-to-deliver is a trade that doesn’t settle within three days.

“We had another word for this in Brooklyn,” said Harvey Pitt, a former SEC chairman. “The word was ‘fraud.....’”

Federal Reserve Bank of San Francisco President Janet Yellen signaled that it was a mistake to allow Lehman Brothers Holdings Inc. to collapse, saying the firm was “too big to fail” and its bankruptcy caused a “quantum” jump in the magnitude of the financial crisis.

“I am told that Lehman had insufficient collateral” for the Fed to provide loans, Yellen said after a speech in New York yesterday. She noted that she was “sitting in California” at the time of the Fed deliberations and “wasn’t involved in anything having to do with it.”

Yellen’s remarks are the strongest to date by a Fed official blaming the Lehman failure for a worsening in the crisis. She echoed calls by Chairman Ben S. Bernanke for new powers for federal authorities to take over and resolve failing nonbank financial firms.

The San Francisco Fed chief, a chairman of former President Bill Clinton’s Council of Economic Advisers and ex Fed governor, also said she now sees a case for using Fed tools to prick asset bubbles to head off systemic crises.

The impact of Lehman’s failure “was devastating,” Yellen said yesterday. “That’s when this crisis took a quantum leap up in terms of seriousness.....”

The warning was ominous: “Massive global wealth destruction.”

That’s what Lehman Brothers Holdings Inc. executives predicted before they filed the biggest bankruptcy in U.S. history. “Impacts all financial institutions,” read one bullet point in a confidential memo prepared for government officials obtained by Bloomberg News. “Retail investors/retirees assets are devastated.”

The message didn’t get through. Two dozen of the world’s most powerful bankers, brought together by Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Bank of New York President Timothy F. Geithner the weekend of Sept. 13, 2008, to devise a rescue plan for Lehman, were too busy saving themselves to see the larger threat.

“The discussion among the CEOs was ‘How do we prevent the next firm from going under?’” former Merrill Lynch & Co. Chief Executive Officer John A. Thain, who cut a deal to sell his company that weekend, said in an interview. “There should have been much more discussion about the impact directly on the markets if Lehman went bankrupt.”

While everyone assembled at the New York Fed was aware that unbridled subprime-mortgage lending and the packaging of such inferior loans into investment vehicles such as collateralized- debt obligations had pushed the financial system to the breaking point, what the bankers missed almost destroyed them -- and the rest of the global economy.....

Former U.S. Treasury Secretary Henry Paulson says in his memoir that he was prepared to support a government backstop to prevent the bankruptcy of Lehman Brothers Holdings Inc. until he learned the firm’s assets were so mis- marked it would have guaranteed a loss to taxpayers.

Going into a Sept. 12, 2008, meeting at the New York Federal Reserve Bank with the leaders of the largest Wall Street firms, Paulson and then-New York Fed President Timothy Geithner agreed that “if a Bear Stearns-style rescue was the only option, we would take it,” the ex-secretary wrote in “On The Brink.”

Although the book isn’t scheduled for release until Feb. 1, Bloomberg News purchased a copy at a New York bookstore.

The government was able to facilitate the merger of Bear Stearns Cos., a failing New York investment bank, and JPMorgan Chase & Co. by having the Fed guarantee $29 billion of Bear Stearns’s assets. A similar rescue of Lehman proved impossible because a deal to sell the investment bank couldn’t be completed, Paulson wrote. The executives gathered at the New York Fed also concluded Lehman had overvalued its assets by at least $37 billion, he said.....