“Dear readers, let us begin this week’s missive by acknowledging its partial incompleteness. For understandable considerations, there are some capital market situations that we cannot discuss. We thank all our readers for their support and look forward to continuing to provide you with timely analysis.”

This is how Lehman Brothers’ strategists began their last ever weekly research note, published on Saturday – only two days before the U.S. investment bank collapsed.

In the 146-page research, Lehman strategists argued that bonds are performing well in September thanks to rising risk aversion and financial institution uncertainties.

“September already shapes up as a splendid month for bonds, thanks to the usual seasonal elevation in risk apprehension accompanied by special amplification through financial institution uncertainties,” wrote strategists at Lehman.

Ironically, Institutional Investor magazine named Lehman Brothers as its top All-America fixed income research team for a ninth straight year on Tuesday.

“September has been a prosperous month for credit risk shorts,” Lehman strategists noted. “With third-quarter earnings for some financials coming out this week and the rest of major corporates over October, with the global economic outlook wilting, and with a hyper-risk sensitive capital market regime in effect, we will maintain our predilection toward short credit exposure.”

Little did they know that their own bank’s collapse would reinforce their argument. Investors dumped risky assets across the board, including equities and credit, sending government bonds sharply higher as Lehman filed for bankruptcy protection and Bank of America agreed to buy another Wall Street giant Merrill Lynch.

How quickly can AIG burn through $20 billion dollars in complex loans? It may not matter much, as the market pummels the once-mighty insurer. With ratings agencies downgrading its debt and the stock cut in half again overnight, the New York State lifeline is likely to be swallowed in the markets tsunami. At less than $5 a share, the stock is worth a fifth of what it was a week ago. Back then it was a $67 billion company. This morning, trading at around $3.80 and falling fast, it will be a company worth a little over $10 billion, so the value of the loan is, well, twice the value of the company. It’s also about four times AIG’s $5.3 billion second-quarter loss, which may help make the the case for a little operational breathing room.

Lehman had to tumble into bankruptcy before any promising buyer interest appeared – if you can call British bank Barclays picking through the debris of an investment bank it opted not to save two days earlier promising. And AIG’s fall is a far bigger shoe to drop than Lehman. “If AIG tanks, that will be the big one. AIG has more to do with the oil price right now than the Saudis do,” said Larry Grace, an energy analyst at Kim Eng Securities in Hong Kong.

What must former CEO and AIG’s largest shareholder Hank Greenberg be thinking? Not only could he personally buy AIG another ten minutes at the roulette table, with his own net worth estimated by Forbes at about $2.8 billion, but he could also have been in possession of a key to salvation, with old relationships in cash-flush China. He apparently offered to help, but was turned away. And besides, he’s kind of tied up with a civil lawsuit brought by NY AG Andrew Cuomo, who has charged him of trying to puff up AIG through transactions that made it look healthier than it was.

Other deals of the day:

* A unit of Russia’s Gazprom and Russian-controlled power firm Centrex plus Italian utility Enia won approval from the European Commission to buy Italian energy supplier Enia Energia.

* IT solutions provider Telvent agreed to buy privately held U.S. firm DTN Holding Company for about $445 million in cash, to reinforce Telvent’s services in the energy, transportation and environment segments and expand into the agriculture segment.

* Merrill Lynch explored selling a minority stake to Goldman Sachs at the weekend before deciding on its $50 billion takeover by Bank of America Corp, the Wall Street Journal said, citing people familiar with the matter.

* Sweden-based medical technology group Getinge has agreed to buy Datascope Corp , a maker of cardiovascular devices, for $865 million in cash.

* Nidec Corp, the world’s largest maker of tiny motors used in hard disk drives, offered to pay up to $283 million to buy Toyo Denki Seizo, aiming to tap overseas demand for motors used in railway cars.

*  Norway’s offshore services group Seadrill said it agreed to sell two rigs to Ship Finance International for $1.7 billion and lease them back, gaining cash for its rig building programme and a new dividend.

Staffers at the once No. 4 U.S. investment bank headed into its midtown Manhattan headquarters on Monday morning, armed with bags and suitcases of all sizes.

Their emotions ran the gamut.

One man caught his co-worker’s eye and threw his hands up in the air in dismay before hurrying into Lehman’s global headquarters, a few minutes’ walk from Times Square.

“It is madness,” one man said on the phone, as he walked by dozens of reporters lined up on the sidewalk in front of the building. 

Another just stood by the corner of the street and gazed up at the building silently for a few seconds before walking in.

Some bought their morning coffee and stood in groups, smoking and talking in the corner near the entrance to the subway station.

Even the coffee cart guys seemed unusually somber, talking very little and shaking hands with their customers.  

Most staffers did a doubletake on seeing the media lineup and refused to answer questions as they walked in. 

But cameramen and reporters pursued those who came out of the building with what seemed like packed bags or boxes. 

A mix of passers-by and Lehman staffers turned their thoughts on the firm’s fall into art, signing a close-up painting of CEO Richard Fuld. 

(Photos: Reuters)

The timing could have been better for the luxury car show at the World Financial Center in New York, home to Merrill Lynch & Co.

The Motorexpo opened on Monday — the morning after Merrill employees were shocked to hear their company was being bought by Bank of America, marking the end of the storied name in American finance.

Nikki Gold, a promoter for the Motorexpo, handing out brochures at the entrance to Merrill’s headquarters, said “A lot of people are in a really sour mood — the people you expect to take the brochures aren’t taking them.”

Those who did take the brochures joked about it, she said.

“They say things like: ‘Good luck with the Expo!’, ‘Don’t know if I can afford this now’, ‘We’ll see if we have a job tomorrow’” she said.

The Motorexpo features Aston Martins, Bentleys and Porsches — but the luxury cars weren’t getting much attention on Monday as Merrill employees were very much focused on other things.  

As CNBC’s on-again, off-again call for the calvary for AIG held the stock market’s attention, Tyler Cowen posted what may well be what we’ll remember about this unusual day: “It’s a little scary that the world’s largest insurance company hasn’t planned for a rainy day.” (Marginal Revolution)

Mark Thoma is monitoring the bailout-moral risk debate on AIG and sides with Willem Buiter in the FT this morning. “Unless we are very certain that telling AIG to ‘go away’ will not endanger the overall economy, then protect jobs and the economy first and foremost by ensuring, minimally, that an orderly liquidation occurs,” he posted in the Economist’s View.

Count Stan Collender at Capital Gains and Games as one of the surprised at the sudden shift of events. After two weeks off the gird, he returns Tuesday and notes “a substantial change in the reporting on the financial situation. There was a certain almost arrogance and swagger just before I left. The mantra was that Bear Sterns was the beginning of the end of the problem. I don’t hear that now.”

Marc Gerstein isn’t too interested in the blame game. “Exotics or not, if you lend a ton of money to people who can’t pay it back, you’re going to suffer.” He puts growth and sentiment models to the test and concludes “we’re still likely to be better off if we own reasonably valued shares of companies with demonstrated records of being able to grow earnings” despite the wrenching transition taking place in some sectors. (Gerstein used to write an investment column at Reuters.com and is now at Portfolio123).

On the broader economic front, Brad DeLong’s Semi-Daily Journal looks at Monday’s Industrial Production release and concludes: “For about a year we have been blessing the disconnect between financial chaos and construction depression on the one side and real-side economic ‘weakness’ elsewhere in the economy. Let’s hope the disconnect continues. But it looks as though it isn’t: the recession has spread out from construction into goods production broadly.”

“Dear readers, let us begin this week’s missive by acknowledging its partial incompleteness. For understandable considerations, there are some capital market situations that we cannot discuss. We thank all our readers for their support and look forward to continuing to provide you with timely analysis.”

This is how Lehman Brothers’ strategists began their last ever weekly research note, published on Saturday – only two days before the U.S. investment bank collapsed.

In the 146-page research, Lehman strategists argued that bonds are performing well in September thanks to rising risk aversion and financial institution uncertainties.

“September already shapes up as a splendid month for bonds, thanks to the usual seasonal elevation in risk apprehension accompanied by special amplification through financial institution uncertainties,” wrote strategists at Lehman.

Ironically, Institutional Investor magazine named Lehman Brothers as its top All-America fixed income research team for a ninth straight year on Tuesday.

“September has been a prosperous month for credit risk shorts,” Lehman strategists noted. “With third-quarter earnings for some financials coming out this week and the rest of major corporates over October, with the global economic outlook wilting, and with a hyper-risk sensitive capital market regime in effect, we will maintain our predilection toward short credit exposure.”

Little did they know that their own bank’s collapse would reinforce their argument. Investors dumped risky assets across the board, including equities and credit, sending government bonds sharply higher as Lehman filed for bankruptcy protection and Bank of America agreed to buy another Wall Street giant Merrill Lynch.