Paulson was down on one knee, begging for a deal

The air turned blue in the White House as the titans of American politics struggled to agree a bailout deal to save the banks. But then it hit the buffers. Rupert Cornwell takes up the story

It was gripping political drama, and it may yet prove to have been a master move by Republicans to rescue the presidential bid of John McCain. But in terms of rescuing America's reeling financial system, the meeting convened by President George Bush on Thursday afternoon was an unmitigated disaster.

A tentative deal on a $700bn (£380bn) bank bailout may – or may not – have been reached late on Thursday morning after days of gruelling negotiation on Capitol Hill. Honest opinions differ on the point. But any deal died barely three hours later in the Cabinet Room of the White House, under the eyes of a helpless Mr Bush, the congressional high command of both parties, John McCain and Barack Obama.

It died despite a crude warning from the President as battle raged around him that "if money isn't loosened up, this sucker could go down". It wasn't clear yesterday whether the sucker in question was the bailout package, the entire US economy, or the McCain candidacy.

It died despite some tongue-in-cheek overacting by Henry Paulson, as the Treasury Secretary dropped on one knee before Nancy Pelosi, the House speaker, imploring her not to "blow up" the deal by withdrawing Democratic support.

"I didn't know you were a Catholic," replied Ms Pelosi, herself of impeccable Italian Catholic ancestry. And anyway, she continued, "It's not me who's blowing this up, it's the Republicans." To which Mr Paulson could only reply, "I know, I know."

Indeed, so much was crystal clear almost as soon as Mr Bush had finished his introductory remarks and reporters had been ushered from the room.

At one end of the Cabinet Room table sat Mr McCain, by all accounts not saying a word though he was arguably the central figure in the drama. At the other was Mr Obama, cool as usual, reportedly peppering Mr Paulson with questions about how the proposed arrangements would work. Then came the bombshell, delivered by John Boehner, the engaging, heavy smoking, golf-playing House minority leader. His Republican flock simply would not accept the package as it currently stood. In effect, it was back to square one.

Discussions then became what was politely termed "contentious" – or more exactly a blazing row between Republicans who felt they were being railroaded into an agreement, and Democrats who believed they had been betrayed and lied to by their opponents, merely to bolster the prospects of Mr McCain.

It was, by any standards, an extraordinary moment. The presidential campaign had suddenly arrived in the White House itself and, in doing so, had taken over the financial crisis.

As The New York Times noted yesterday, it was the precise outcome that Bush administration claimed to want to avoid, of rough-and-tumble presidential politics "trampling" delicate congressional negotiations that had appeared to be on the brink of success.

The turn of events was also a stark reminder of how little clout remains to this President – not so much a lame duck as a dead duck. In his own house, Mr Bush was defied by his own Republicans. He could not impose his will, nor even keep proceedings under control. "Most of the meeting was very constructive," Dana Perino, the White House spokeswoman, gamely insisted yesterday. "Most", alas, is not the same as "all."

But that was still unknown to journalists as they waited in a gentle drizzle outside the main West Wing entrance, still expecting that the session inside was merely a matter of tying ribbons on the deal. Perhaps, some speculated, it would even be confirmed by a joint appearance of Messrs Obama and McCain in person. That impression was utterly banished by the first person who did appear, quite unexpectedly: Alabama's senior senator, Richard Shelby.

Pugnacious and blunt-spoken as always, the ranking Republican on the Senate Banking Committee did not mince his words. "The agreement is obviously no agreement," he told reporters, brandishing a five-page document signed by many leading economists, setting out their objections to the Bush/Paulson package. And that was that. Mercifully, the markets had closed an hour earlier, and thus could not be sent plunging by the unanticipated breakdown. For their part, the two candidates slunk out of the building.

Mr McCain said later that he knew before he went to the White House that there was no deal, although he did not say as much to anyone. So much for the role of the man who spectacularly broke off his campaign to go back to Washington and take the crisis in hand – but in the end had no discernible impact on proceedings whatsoever.

Small wonder that furious Democrats believed the 11th hour Republican revolt in the House was aimed at sparing their man the embarrassment of having returned to the capital amid such fanfare, when a deal had been already put together without him.

That undoubtedly is one explanation for their behaviour but far from the only one. The Republicans most opposed to the bailout are conservatives who genuinely believe it is naked socialism. Let the Democrats be responsible on their own, they reason.

That would only prove once more that Democrats are the party of big spending and state intervention – a sin for which they would pay a price at elections less than six weeks away, when ordinary Americans would vent their anger at this latest windfall for the Wall Street fat cats, at taxpayers' expense.

The unanswered question that is left over is whether the McCain gambit will pay off. Will it prove to be a smash, or a bomb? Will he be seen as a selfless patriot who put country ahead of party politics, or a cynical and impulsive showboater?

No one knows. Unarguably however, the Republican has stolen the show during 48 of the most dramatic hours in recent Washington history. In the meantime, Mr Obama has been calm, unflappable and – in comparison – invisible.