Lehman’s troubles are spreading not only through its headquarters in Midtown Manhattan, but through the surrounding streets.

From the nearby gyro cart to the glitzy bar a stone’s throw from the bank, many others are feeling the ripple effect.

At Tonic Restaurant & Bar, business has taken a significant hit since the end of February, said Joseph Jacobino, its marketing and sales director. Before February, Lehman had two to three corporate events at the midtown bar each week, Jacobino said.

“They scaled back dramatically — to none,” he said. “It was a significant loss to us.”

Even those insiders who have managed to cling to their jobs walked in and out of the building on Thursday looking worried and avoiding eye contact.

“These are tough, tough times,” said a Lehman staffer in its IT unit, as he bought coffee. As the bank’s stock value withers, he was thankful for being a relatively new employee because he has far less invested in the stock than more senior colleagues.

“Scary,” he said. “There are people inside who have been here for years. I’ve just been here one year.”

For those who got axed in Lehman’s latest round of job cuts, it was drinks one last time at Tonic on Wednesday, said the bar’s manager, who requested anonymity.”It was depressing. A group of guys … they were saying goodbye to each other, about 40 of them,” he said.

Bartender Alison Ryan worried about what that would mean after the toasting and cheering die out and traffic dries up.

“That’s good short term, but bad in the long run,” she said.

(Photo: Lehman staff standing in a meeting room at Lehman Brothers’ offices in the financial district of Canary Wharf in London on Sept. 11, 2008. Lehman wouldn’t tell us what was going on in the photo.)

The specter of Bear Stearns has never loomed so large outside the offices of Lehman Brothers. The embattled investment bank made a tough call deciding to auction a crown jewel in a market convinced the bank is close to a going-out-of-business sale.  With its stock price crashing, its credit rating shaken and murmurs up and down Wall Street about its counterparty risk, analysts are increasingly convinced that the Fed’s liquidity window - opened to investment banks after Bear’s collapse - will not be enough to save the house.

Chief Executive Dick Fuld implied on Wednesday that he was open to selling the firm, but who would buy now if they could buy later at a cheaper price? And if Lehman is the bride in a shotgun wedding officiated by the Fed’s Ben Bernanke, who would be the groom? Goldman Sachs’ share price fell 2 percent in early trading, and Morgan Stanley is just across the street… a couple doors down 7th avenue from a strip club, in case anyone wanted to throw a batchelor party. 

Other deals of the day:

* Japanese dairy goods maker Meiji Dairies will take over chocolate producer Meiji Seika in a stock deal worth about $1.8 billion, creating the country’s fifth-biggest food company.

* CCMP Capital has joined a group led by Japan’s Unison Capital that aims to buy out Daito Trust Construction, filling gaps left by other funds which have reduced their involvement, financial sources said.

* South African IT company Datatec said it has bought a 50.01 percent stake in Inflow Technologies Private, an Indian ICT distribution business, for an undisclosed amount.

From the Iranian coffee cart guy to the Italian graduate student, almost everyone who walked past Lehman Brothers’ headquarters on a  windy Wednesday morning in New York seemed to stop and mull its future.

Philipp Steiner, a graduate student in entrepreneurship from Italy, walked up to Lehman’s offices at 50th St. and 7th Ave after reading news about the investment bank’s $3.93 billion quarterly loss on the famous news ticker a few blocks south in Times Square. There’s never such big news in Italy, he said. Still, he didn’t think Lehman bankers had too much to worry about, despite its troubles.

“I would see that as a good experience, and then move on to another job,” Steiner said.

Moving on seemed a serious option to the Iranian coffee cart guy as well, who mulled Tuesday’s 45 percent plunge in Lehman’s stock price in an exchange with one of the firm’s employees.

“Can you believe the shares are now around $7?” he asked, as he handed the Lehman employee his coffee.  Seven cups would buy roughly one share of stock; last November, it would have taken 68 cups.

“It sucks,” the employee shot back, shaking his head as he retreated into the building.

Lehman reported its record loss on Wednesday, but sought to quell investors’ worries with plans to sell a majority stake in its asset management unit and spin off commercial real estate holdings.

But within the bank’s working ranks, its troubles have rocked the faith of more than just its old timers. 

“This is my first day at Lehman, I literally just signed my papers,” said one worried-looking man, as he smoked a cigarette.

And for a trader who’d joined Lehman from Bear Stearns just three months ago, it could not have been worse timing.

“Who would have known everything would collapse?” he said.

Some employees were steeling themselves for even worse news to come.  Some were preparing to move on to new employers.

“It is sad for anybody,” the coffee vendor said. “They just bought houses for a couple million dollars and now they are going to lose their jobs. How are they going to manage?”

“Things are pretty bad … there’s not much left to say,” said a Lehman employee who works for its capital markets unit. He said that between his anxious family and Lehman’s battered stock, he planned to decide this week whether to keep working for the 158-year-old company.

Hany Besha, who has run another coffee cart on the block for nearly 10 years, is already getting hit by Lehman’s troubles. Business is down 50 percent, he said.

“They are here today and gone tomorrow,” he said. “One of my customers told me, ‘I don’t know if I will see you tomorrow or not. If I don’t, have a good life.’”

(Photos: Reuters)

Uncovering another dire quarter, with $5.6 billion in net writedowns and a worse-than-expected $3.93 billion loss, Lehman Brothers said it plans to sell a majority stake in its investment management division and spin off commercial real estate assets. The Koreans aren’t buying — they officially ran for the hills overnight — and Lehman also moved to dump other assets before announcing its results. It said in a filing it was chopping its stake in BHP Billiton almost in half, to below 3 percent. Back when Korea Development Bank was still interested in a Lehman stake, the word was that the two sides were having trouble agreeing on a price. Analyst Dick Bove said the bank was refusing to take what it believed were fire sale prices for its key assets. The question now is whether the offer of a majority stake in its investment division represents a change of heart — one that could smack of desperation for a market all too ready to believe the worst.

Other deals of the day:

* Coca-Cola plans to seek approval under China’s antitrust law for its $2.5 billion bid for top domestic juice-maker China Huiyuan Juice Group, the final obstacle to what would be the largest foreign takeover of a local firm, Huiyuan said.

* Infosys Technologies , India’s second-largest software services exporter, said it was confident its bid for Britain’s Axon Group would succeed and there was no rival bid on the table at the moment.

Nobody knows better than South Korea how elusive the floor can be when markets are crying fire-sale. Pushed to the wall during the Asia Crisis a decade ago, the country’s banks had their assets priced in the pennies-on-the-dollar range. Here now, with the shoe squarely on the other foot, is Korea Asset Management, a government debt clearer that says its purchase of illiquid Merrill Lynch debt securities is faltering over price. Local media reported in July that Kamco planned to raise up to 2 trillion won ($1.98 billion) to buy U.S. non-performing loans with Shinhan Bank and Mirae Asset Securities. Kamco had said it was in the process of raising about $1 billion to buy distressed mortgage assets from U.S. banks and expected double-digit returns from its investments. Hardly the kind of buying clout that Merrill faced when it agreed to sell $30.6 billion of collateralized debt obligations to a Lone Star affiliate in July for 22 cents on the dollar. If nothing else, execs at Lehman Brothers will be watching this high-stakes haggling with much nervous interest as they negotiate with another South Korean state-owned institution, Korea Development Bank, over a possible joint investment in the CDO-laden U.S. investment bank.

Other deals of the day:

* Novolipetsk Steel, the Russian steel maker owned by billionaire Vladimir Lisin, has agreed to pay $400 million in cash to acquire U.S. hot-rolled steel maker Beta Steel and expand its presence in North America.

* InBev is to hold an extraordinary shareholders meeting on Sept. 29 to vote on its planned $52 billion takeover of Anheuser Busch and related matters.

* Private equity firm Advent International has taken a majority stake in Swiss duty-free retailer Dufry by means of a share swap that combines it with the U.S. firm’s airport retailer Hudson. Dufry, which already held an 11.2 percent stake in Hudson that it bought in April, said it was swapping Hudson’s common stock for Dufry equity and refinancing its approximately $390 million in debt. The total value of Hudson’s equity is $446 million.

Coke pulled off the single largest takeover in Chinese history overnight, offering to buy juice maker Huiyuan for three times what the company was worth. Braving a notoriously difficult foreign M&A environment, where the state dominates the corporate sector and pumps out reams of regulatory red tape and where nationalistic pride often triggers protests when foreign firms gain influence over domestic firms. Since capitalism is good these days, that premium should go a long way toward suppressing any nationalistic distaste with the deal. Interesting to note that Chinese inbound corporate deals so far are up 30 percent from a year ago, to $15.3 billion.

Hedge fund manager Ospraie Management will close its flagship fund after it plunged 27 percent in August on losses in energy, mining and natural resources equity holdings, in one of the biggest ever closures of a commodities-focused hedge fund. The closure of the fund, announced by the firm’s founder Dwight Anderson in a letter to investors on Tuesday, could be more bad news for Lehman Brothers, which took a 20 percent stake in the hedge fund manager in 2005. One expert said the closure of the fund, which at the time of the letter’s writing had lost 38.59 percent this year, may also have played a role in bringing down U.S. stocks yesterday, which fell after initially climbing more than 1 percent. Lehman shares were down more than 3 percent in after-hours trading.

Other deals of the day:

* South Korea’s military savings fund would consider joining Korea Development Bank in a bid for Lehman Brothers if KDB made such an offer, as now appears a good time for U.S. investments, the fund’s chairman said.

* Friends Provident, Britain’s smallest blue-chip life insurer, will not sell its Lombard and F&C units if it cannot get a good price, recently appointed chief executive Trevor Matthews said.

* Mitsubishi UFJ Financial Group will likely fold one of its small consumer finance units into affiliate Acom, a newspaper said, the latest move by a Japanese bank to strengthen its position in the struggling consumer lending market. Mitsubishi UFJ, Japan’s largest bank, will seek to merge unlisted DC Cash One with Acom, the Nikkei newspaper said.

* Irish supermarket group Superquinn has received six expressions of interest from potential bidders, including Britain’s Asda and J Sainsbury, the Irish Times newspaper said.

Turns out, Korea Development Bank is in talks with Lehman Brothers - but now, after the government threw cold water on prospects for a solo KDB investment, the question has become which local bank will be partnered up with the state-run bank for this bold investment. KDB was to be a “cheerleader” rather than the main player in any deal, the government said. KDB CEO, Min Euoo-sung, headed Lehman’s local operations until earlier this year, so he’s well placed to wield the pom-poms. Investors there are nervous - which they should be given Lehman’s more-than $60 billion of mortgage and mortgage security exposure. South Korean bank shares tumbled today as markets pondered which mighty institution might be encouraged to step up. Names to keep in mind are Shinhan Financial Group, Woori Finance Holdings and Hana Financial Group. How much Lehman might a KDB-backed venture buy? Min said one possibility was for KDB to form a consortium with private banks to jointly buy Lehman. Pricing remains an issue, of course. The Telegraph reported Lehman had stepped up talks with KDB to raise as much as $6 billion in a share sale that could be concluded this week.

Other deals of the day:

* Natural gas producer Chesapeake Energy said it agreed to sell a 25 percent interest in its Fayetteville Shale assets in Arkansas for $1.9 billion to BP America, a unit of BP.

* The world’s third biggest platinum producer Lonmin said a merger with Xstrata would lead to major synergy benefits and the firm would like to hold talks with its hostile suitor if a formal bid is made at a higher level.

* French utility group GDF Suez said it would buy U.S. electricity provider FirstLight Power Enterprises. GDF gave no financial details in a statement, but according to industry sources quoted by Le Figaro newspaper the deal would be worth 1.3 billion euros ($1.91 billion).

Singapore’s Temasek made clear how bullish it is on Merrill Lynch in a Bloomberg TV interview, expressing great confidence in CEO John Thain. The news service reported that the Singapore wealth fund has U.S. clearance to raise its stake in the brokerage to as much as 14 percent. That would be worth roughly $1.7 billion on the open market. Though less if they issued new shares, it would certainly help Merrill deal with the $5.7 billion in write-downs it said it would take in the third quarter, and would probably be worth even more as a sign of steady capital support from its biggest share holder.

Such lifelines are likely to keep pumping funds into struggling Western banks, according to a regional executive at one of the world’s biggest institutional money managers. Hon Cheung, regional director of the Official Institutions Group in Asia at State Street Global Advisors said he expects the funds increasingly to adopt passive investment approaches, given the need to move large amounts of money without disrupting markets. “Their purpose is not to support the U.S. taxpayer or the U.S. economy or to ensure stable global markets. If by doing that, they get a side benefit that’s great. But their principal job is to benefit the stakeholders,” said Cheung. And as these sovereign wealth funds aren’t even really beholden to share holders, they may have stomach for even more stunning losses.

Lehman Brothers has asked three private equity firms to remain in the bidding for its asset management arm even though the investment bank has yet decide on whether to sell the unit, the Financial Times reported. Kohlberg Kravis Roberts, Hellman & Friedman and Bain Capital have been told by Lehman that their bids are high enough to go forward, the paper said, citing people familiar with the matter. Although Lehman has not reached a decision, it has been soliciting bids from private equity firms to gauge interest in its asset management arm, which includes Neuberger Berman, the fund manager, and minority stakes in several hedge funds.

Other deals of the day:

* Steelmaker POSCO and Hyundai Heavy Industries officially expressed interest in acquiring a majority stake in world No. 3 shipyard Daewoo Shipbuilding & Marine Engineering estimated at up to $8 billion.

* ConocoPhillips is expected to sell the remainder of its 600 company-owned gasoline stations to PetroSun West for $800 million, the Wall Street Journal said.

* Danish shipping and oil group A.P. Moller-Maersk said it was launching a bid worth 3.62 billion Swedish crowns ($569 million) for shipping company Brostrom.

* Sweden-based private equity firm EQT said it had sold its remaining stake in paper products maker Duni AB for an undisclosed sum.

* British market research group Taylor Nelson Sofres said it continued to oppose a hostile takeover bid from WPP despite preferred suitor GfK giving up its takeover attempt.

* Commonwealth Bank of Australia, the country’s second largest bank by assets, was unlikely to buy Indonesia’s Bank Ekonomi Raharja, an industry source told Reuters.

* Leading Turkish conglomerate Sabanci Holding wants to find a partner for its insurance unit Aksigorta rather than selling it, said group chairwoman Guler Sabanci.

* AIM-listed Proventec Plc, which provides specialist steam cleaning and coatings technologies, said it has acquired a 60 percent stake in German engineering company Frank for an undisclosed sum.

* Singapore-based KOP Capital, controlled by the emirate-owned Dubai Group, will buy a 50 percent stake in European hotel chain Stein Group for $250 million, and spend about the same amount on new hotels in Asia.

* Private equity firm 3i Group may invest 8-10 billion rupees ($183-$229 million) in a south Indian port operator for a stake of up to 26 percent, the Mint newspaper said, citing an official at the Indian firm.

* New Zealand grocery co-operative Foodstuffs will not appeal a court-imposed ban on it bidding for New Zealand’s largest-listed retailer, The Warehouse Group, the company said.

Singapore wealth fund Temasek may have gotten hold of some bad stuff this year when it bought a 9 percent stake in Merrill Lynch. The stock has lost more than half its value since the purchase was announced in late December. But far from swearing off noxious bank assets, the flush Asian fund says it wants more. And why shouldn’t it? It just doubled its full-year profit by selling assets in local power and its national telecoms and airlines companies, as well by cutting a stake in Bank of China, so the toxicity of Merrill’s share price is not making it sick. Financials grew by two percentage points to 40 percent of its portfolio in the year through March and are likely to grow further, with Temasek saying it expects contagion from the credit crisis to spread. That should keep prices down for a while. Temasek said it will not cap its investments in the sector, but it was mum on whether it was thinking of taking on any Lehman exposure.

India’s largest oil producer ONGC has agreed a 1.4 billion pounds ($2.6 billion) takeover of Russia-focused oil explorer Imperial Energy Corp as it works to secure energy to fuel India’s booming economy. Imperial said ONGC’s overseas arm, ONGC Videsh, would pay 1,250 pence in cash for each of its shares in a deal that could double state-owned ONGC’s proved and probable reserves. This is less than the 1,290 pence approach Imperial said last month it was discussing with an unnamed bidder, which sources close to the matter identified as ONGC. Investors aren’t wholly convinced though, with the shares trading down more than 1 percent this morning after rising sharply in recent weeks on hopes for a bidding war.

Infosys Technologies agreed to buy British consultancy Axon Group for 407 million pounds ($753 million) as India’s second-biggest software services exporter looks for growth beyond an uncertain U.S. market. The cash deal values Axon at six pounds per share, a 19.4 percent premium over Friday’s close of 5.025 pounds and 33 percent over the average price of the last six months, Infosys CEO Kris Gopalakrishnan said. The stock has risen to 611, and Infosys shares have taken a hit as expectations rise another bid will emerge. Altium Securities said in a note it believed there was room for a counterbid closer to 700 pence.

Other deals of the day:

* Hyundai Heavy Industries, the world’s top shipbuilder, expressed its interest in Daewoo Shipbuilding, joining three other major bidding groups vying for its smaller rival. State-owned Korea Development Bank (KDB) and a government agency have put up for sale their combined 50.4 percent stake in the world’s No. 3 shipbuilder, in a deal estimated to fetch up to $8 billion, more than double Daewoo Shipbuilding’s current market price.

* Bluescope Steel, Australia’s top steel maker, will sell its New Zealand iron sands mining operation for NZ$250 million ($176 million) to Hong Kong’s Cheung Kong Infrastructure Holdings, the company said.

* Pennar Industries said Hyderabad’s JR Realtor Services had acquired 13 million shares, or 10.28 percent of its share capital.

The yo-yo that is Lehman Brothers’ stock took another spill before the market opened on Monday, after a top South Korean regulator threw cold water on the idea of a state bank buying the battle-scarred Wall Street warrior. Financial Services Commission Chairman Jun Kwang-woo told reporters Korea Development Bank (KDB) should be a “cheerleader” and let local private banks take the lead in any such purchase. KDB’s interest lit a rocket under Lehman’s shares on Friday. When asked about the status of KDB’s possible interest in Lehman Jun said: “That would be an international marriage. Would you get married just after one or two blind dates?” A couple of blind dates might be a step up from the shot-gun buyouts that South Korea’s banks faced after the Asia crisis.

Canada’s Precision Drilling Trust will buy U.S. driller Grey Wolf for $2 billion in cash and stock, creating one of the largest North American oil and gas rig operators. The announcement comes a month after Grey Wolf shareholders voted down a proposed purchase of well-servicing company Basic Energy Services. Precision Drilling, Canada’s largest oil and gas driller, first made an unsolicited purchase offer for Grey Wolf in June. News that a deal had been struck emerged on Sunday. Based on financial results through June, the combined companies will have annual revenue of $1.8 billion.

Germany’s Commerzbank could buy insurer Allianz’s Dresdner Bank possibly by the end of this month, according to a source familiar with the situation at the bank. German weekly Welt am Sonntag said an agreement between the two was possible within the coming week. The two companies had agreed on the basic principles of the transaction, according to the paper, which said Commerzbank would buy Dresdner for slightly more than 9 billion euros ($13.38 billion) and Allianz would vouch for writedowns on the balance sheet of Dresdner of up to 1 billion euros. The sums were still being negotiated. Allianz would have a stake of slightly less than 30 percent in the merged bank, the report also said.

Australia has approved Chinese aluminum giant Chinalco’s recent purchase of a minority stake in Anglo-Australian miner Rio Tinto, but warned the Chinese firm against buying more shares without prior approval. State-owned Aluminium Corp of China (Chinalco), backed by U.S. peer Alcoa, began amassing shares this year with the aim of taking up to 14.9 percent of Rio, the target of a $127 billion takeover bid from rival BHP Billiton. Treasurer Wayne Swan said Chinalco had already vowed not to raise its stake above 14.99 percent without receiving fresh government approval and, secondly, not to seek to appoint a director to Rio Tinto’s board. Rio Tinto is at the center of a tug-of-war that reflects China’s anxiety over BHP Billiton’s proposed all-share bid for Rio, which would create a titan unrivaled in its degree of control over a wide range of industrial commodities. Rio is a major aluminum producer and both it and BHP are global suppliers of copper, but China’s biggest concern about the takeover bid surrounds iron ore, which is used in steel-making.

Other deals of the day:

* Japanese brewer Kirin Holdings is expanding its food business in Australia through unit National Foods’ $780 million acquisition of Dairy Farmers, helping it diversify away from a shrinking domestic beer market as Japan’s population ages.

* Lufthansa has formally announced its interest in acquiring a stake on offer in Austrian Airlines, a spokesman for the German carrier said. OeIAG is offering its 43 percent share in Austrian, worth around 157 million euros ($233.4 million), but said the size of the stake sold would depend on preserving an Austrian group of core shareholders owning 25 percent between them.

* Irish food group Glanbia said it would spend $315 million to buy Optimum Nutrition Inc, a U.S. maker of supplements for body builders, which will use by-products of its cheese manufacturing.

* Singapore Telecommunications said it has bought a 60 percent stake in Singapore Computer Systems for S$140 million ($99 million) as it seeks to boost its IT business.

* Norwegian shipping group DOF ASA said that uncertainty in the financial market had forced it to re-evaluate a planned buyout of offshore services group DOF Subsea.

* MLP Chief Executive Uwe Schroeder-Wildberg was quoted by Swiss finance newspaper Cash Daily as saying he believes Swiss Life’s plan to take over the German financial adviser would fail.