After the Panama Canal Company went bankrupt in 1888 amidst charges of fraud, Bunau-Varilla was left stranded in Panama. He began the difficult search for a new opportunity for canal construction. When the New Panama Canal Company sprang up back in his native France, Bunau-Varilla sailed home, having purchased a large amount of stock. However, as de Lesseps' company had before, the New Panama Canal Company soon abandoned efforts to build the canal, selling the land in Panama to the United States, in hopes that the company would not fail entirely. The U.S. President then was Grover Cleveland, an anti-imperialist who avoided the canal issue. With the ascension of a more opportunistic leader, Theodore Roosevelt, canal planning resumed in the United States.
Bunau-Varilla, as vociferous as ever, incessantly promoted the construction of the canal. With aid from the New Panama Canal Company's New York attorney, William Nelson Cromwell, he eventually persuaded the government to select Panama as the canal site, as opposed to the popular alternative - Nicaragua. (When opponents voiced their interest in constructing a canal through Nicaragua, which was a less politically volatile nation, Bunau-Varilla actively campaigned throughout the Northeast, carrying pictures and postage stamps of Nicaragua's Mt. Momotombo spewing ash and lava over the proposed route.) Through extensive lobbying of businessmen, government officials, and the American public, Bunau-Varilla successfully convinced the U.S. Senate to appropriate $40 million to the New Panama Canal Company in the form of the Spooner Act of 1902.
Although his company was now in possession of a vast sum of money with which to build the canal, there still remained the issue of Colombian governmental cooperation. When a treaty between the South American power and the United States fell apart in the Senate, Bunau-Varilla began drawing up war plans with Panamanian juntas in New York. By the eve of the war for Panamanian independence, the wily French engineer had already drafted the isthmian nation's constitution, flag, and military establishment, and promised to float the entire government on his own checkbook. Although prepared for a small-scale civil war, Bunau-Varilla was relieved that the affair amounted to little more than the incidental killing of a Chinese civilian and the death of a donkey. As promised, President Roosevelt, on the conjectured day of battle, interposed a U.S. naval fleet between the Colombian forces south of the isthmus and Panamanian separatists.
Bunau-Varilla, as Panama's Ambassador to the United States invested with plenipotentiary powers by President Amador, later entered into negotiatiations without formal consent of the Government of Panama with the American Secretary of State John Hay, establishing the Hay-Bunau-Varilla Treaty, which gave control of the Panama Canal to the U.S.. No Panamanians signed the treaty although Bunau-Varilla was present as the diplomatic representative of Panama (a role he had purchased through financial assistance to the rebels), despite the fact he had not lived in Panama for seventeen years before the incident, and he never returned