Darling ‘grin-fucked’ US over Lehman bankruptcy

Former US Treasury Secretary Henry Paulson accused Alistair Darling of "grin-fucking" America over the bankruptcy of Lehman Brothers last year.

The revelation comes in a new book that suggests the Chancellor was significantly tougher and more astute over the events leading to the financial crisis than had been generally thought.

The fall of Lehman Brothers last September was a key event in the unfolding of the financial crisis. Its bankruptcy gave the lie to the idea that a bank could be 'too big too fail', leading to a catastrophic loss of confidence in the banking system.

According to the candidly titled Too Big to Fail: Inside the Battle to Save Wall St by New York Times columnist Andrew Ross Sorkin, Paulson had been attempting to manoeuvre British bank Barclays into a last-gasp rescue of Lehman Brothers. President George W Bush's administration had already announced taxpayers' money would not be used to bail out banks.

However, for a British bank to acquire a failing American bank, Darling would have needed the US government to make a financial commitment. The Chancellor was also not prepared to risk the possibility that in its haste to acquire Lehman Brothers, Barclays may not have conducted the appropriate level of due diligence.

Sorkin claims that Paulson did not discover the existence of these criteria until late on the Sunday of the weekend of September 14. As Darling was unprepared to waive the criteria, and Paulson would not make a financial commitment, the only option was to allow Lehman to go bankrupt.

Sorkin says that in a telephone conversation Darling told Paulson he did not want to import America's "cancer".

The writer also quotes a banker involved in the proposed rescue as saying of Britain: "Isn't this our closest ally in the world?"

To which Paulson replied: "Guys, trust me. I have done everything I can. There is no deal." The British, he said, had "grin-fucked us".

A British Treasury source told the Times that Darling never referred to an American 'cancer': "That may have been what Hank Paulson chose to describe it as, but that's not Alistair's words."

Apparently "there were lots of unanswered questions... Given the risk to the British taxpayer, that's why we continued asking tough questions and didn't get clarity".

Whether these revelations will do Darling's battered reputation for financial nous any favours is debatable. But with America today finally joining France and Germany in positive economic growth - leaving Britain mired in its own, lonely recession - he needs all the help he can get.