Lehman Brothers leads broad financial retreat; Cleveland-Cliffs fights Harbinger over Alpha deal

By Aaron Hochman-Zimmerman

New York, Sept. 9 - Investors became more certain that the honeymoon for the financials following the bailouts of Fannie Mae and Freddie Mac was over.

Lehman Brothers Holdings Inc. drilled through a few layers of bedrock to find close to a nine-year low.

The rug was pulled out from under the limping Wall Street big boy when a rescue package from the Korea Development Bank began to seem less and less like a reality.

Other prominent names such as HSBC Holdings plc were considered to fill the rescuers' shoes, but no announcements have come from other potential investors.

The slow-but-steady decent in the financial sector gave investors time to discuss the merits of the economic plans put forth by both presidential tickets; however, Cleveland-Cliffs Inc. had more immediate concerns.

Before Nov. 4, management faces a vote to allow its planned merger with Alpha Natural Resources Inc., although the deal is opposed by Harbinger Capital Partners.

Also, the New York State officials published the list of conditions Spain's Iberdrola SA must agree to by Sept. 15 in order to proceed with its acquisition of Energy East Corp.

The conditions were printed too late in the day to have a major effect on share prices as Energy East only saw a slight dip in trading.

Meanwhile in the wider market picture, the Dow Jones Industrial Average was slammed again as it ended lower by 280.01, or 2.43%, at 11,230.73, and the Nasdaq Composite index gave up 59.95, or 2.64%, to finish at 2,209.81.

The S&P 500 was the hardest hit of the major U.S. indexes as it bled for 43.28, or 3.41%, to close at 1,224.51.

Lehman lashed

The smallest of the remaining major investment houses, Lehman Brothers, may have had its share prices kept afloat in recent sessions by the hopeful chatter surrounding a liquidity injection from the Korea Development Bank.

Market watchers and even political leaders in the United States and Asia weighed in on the probability and the benefits of such a deal.

Opinions of the deal varied, but recently investors had become more convinced that talks between the two had ended without success.

By the end of the session on Tuesday, it was clear that if Lehman Brothers is eventually to take on a major investor, Korea Development Bank is not it.

For now, Lehman Brothers is still left to face the credit crunch and the volatility in the financial sector all on its own.

HSBC to step in?

One trader said he believes it will be an old financial stalwart, not a newcomer like Korea Development Bank, to finally hang the sold sign on Lehman Brothers' door.

"I expect the likes of HSBC buys Lehman," he said, after hearing the name come up "in the Korean syndicate" where other names where mentioned as well.

Still, if Lehman Brothers does not find the proper deal, it is completely plausible that the bank could survive on its own. It would be "easy for them to go it solo," the trader said.

The value of Lehman Brothers (NYSE: LEH) shares were almost halved as the price fell $6.36, or 44.95%, to finish the session at $7.79.

HSBC's American Depositary Shares (NYSE: HBC) fell $0.84, or 1.06%, to close at $78.27.

Cleveland-Cliffs faces steep climb

On Monday Cleveland-Cliffs fired a shot aimed directly at its largest shareholder, Harbinger Capital, which holds a 16% stake.

The letter sent to shareholders asked them to vote against allowing Harbinger to expand its stake and influence over the future of the Cleveland-based mining company.

"To ensure that no single investor can acquire effective control over your company's future strategic decisions, we urge you to vote AGAINST the Control Share Acquisition proposal" on Oct. 3, the letter said.

Harbinger has expressed its dissatisfaction with the amount it would receive if Cleveland-Cliffs' $10 billion deal with Alpha Natural Resources is completed.

"The letter is not surprising," said BMO Capital Markets analyst Tony Robson, but what people need to understand is that the Harbinger vote will not be the only issue on the table during the Oct. 3 meeting.

"The main vote is not the Harbinger vote, it's actually the move to acquire Alpha," he said.

Trying to measure the reactions of clients without divulging too much, Robson said the vote is "touch and go."

"Doing the math," he said, to approve the deal with Alpha Natural Resources in one scenario, management will need 48% of all eligible voters to cast a ballot and of those ballots, all of the non-Harbinger votes must be for the deal.

Robson admits that it is unlikely that only 48% will vote, but he points out that many others will likely vote along with Harbinger.

If the deal with Alpha Natural Resources is killed, going forward "anything could happen," he said.

Harbinger has suggested Cleveland-Cliffs put itself on the market, but further speculation hinges on how much power Harbinger has in the future, Robson said.

"It may hard for Harbinger to get approval" for a larger stake, he said, adding that if it is barred from increasing its 16% stake, Harbinger will likely look for a way to divest.

Shares of Cleveland-Cliffs (NYSE: CLF) dug deeper by $8.91, or 11.59%, to find itself at $67.94.

Shares of Alpha Natural Resources (NYSE: ANR) burrowed down by $9.36, or 12.73%, to end at $64.14.

NY sets conditions for Iberdrola

Iberdrola was shown the final steps of the path it must take to break into the energy market in upstate New York through the purchase of Energy East.

The New York State Public Service Commission published a list of conditions that must be agreed to by Sept. 15.

Most expect Iberdrola to accept the commission's terms, but the company said it will thoroughly review the new conditions.

Shares of Energy East (NYSE: EAS) slipped $0.12, or 0.42%, to $28.22.

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