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)

“Caution”, “nervous”, “uncertain”… not exactly the kind of words usually heard at a private equity conference. Attendees usually have far too much swagger for safety. But those, and worse, were the reiterated remarks at such a conference in New York on Tuesday, hosted by Dow Jones.

“It is going to be eerie for a while,” said Goldman Sachs global head of merchant banking, Richard Friedman. “Risk will become a four-letter word at this point. Everyone’s going to be more cautious.”

Friedman said it was too soon to predict the consequences of Lehman’s bankruptcy and Merrill Lynch’s hastily arranged takeover by Bank of America, but said having fewer providers of capital “I don’t think will be a good thing”.

For private equity, the hurdles to doing deals remain, with financing sources shrunk and daily blows of bad news from Wall Street. Both Friedman and Thomas H. Lee’s Scott Sperling, on the same panel, said prices being asked for businesses were still too high to be attractive. 

Pension fund managers are also nervous. “We’re stepping up conversati0ons with GPs (general partners) about everything we’re doing,” said CalPERS portfolio manager Michael Dutton. Dutton said in this environment, investors had to raise the bar and do more cautious diligence.

“My guess is it will become Darwinian,” said Goldman’s Friedman, when asked about fundraising. Investors will have to make tough choices about where to funnel their funds and which private equity firms to choose.

Still, those in the eye of the storm from the weekend’s developments soldiered on. William Hughes, the head of Lehman’s U.S. Loan Syndicate Group, showed up to speak on an LBO panel discussion, alongside Greg Margolies, Merrill Lynch’s head of leveraged finance and capital commitments. 

(Picture credit: Reuters)

We’ve certainly had some market turmoil recently. But things could get worse, according to Mark Patterson, chairman of MattlinPatterson, a private equity fund that specializes in investing in distressed companies.

Financial conditions are “probably more challenging than at any time since 1929,” Patterson said, speaking at Dow Jones’ Private Equity Analyst Conference on Monday.

“We’re not in normal times. If you don’t accept that there is at least a 20 to 25 percent chance of a financial markets led depression you’re fooling yourself.”

Patterson also said he believes 300 to 500 U.S. banks are set to fail.

As for distressed investing, Patterson said that despite pullbacks in the market, very few industries are significantly undervalued.

“In the industry of catching falling knives there are lots of bleeding hands today. Some of the smartest people you could name … have been piling in to what appear to be significant diminution of value in industries and finding they are in 20 to 80 percent too early.”

“Perhaps our single best asset in the portfolio today is patience,” he said.

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.”