Lehman Brothers Again Hit by Credit Fears

Updated from 12:41 a.m. EDT

Shares of Lehman Brothers(LEH Quote) sank to their lowest levels in more than eight years Thursday, after a rumor that bond giant Pimco was curtailing trading with the firm.

Lehman's stock, which had dipped as much as 19% Thursday morning, rebounded after a Pimco spokesman denied the rumor. Still, a litany of bad news for government-sponsored mortgage giants Fannie Mae(FNM Quote) and Freddie Mac(FRE Quote) and Capitol Hill testimony painting a grim picture for big banks continued to weigh on the stock.

Lehman shares closed down 12.4% to $17.30. Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson testified to the House Financial Services Committee about the need to overhaul regulation of financial markets.

Both men noted the near-bankruptcy of Bear Stearns, which was bought by JPMorgan Chase(JPM Quote) with the Fed's assistance in a March fire sale, have underlined the need to set up a regulatory framework to mitigate a systematic impact. Lehman, the smallest of the major Wall Street investment banks in the wake of Bear's collapse, has been viewed by many as at risk for a similar collapse.

"[I]n light of the Bear Stearns episode, the Congress may wish to consider whether new tools are needed for ensuring an orderly liquidation of a systemically important securities firm that is on the verge of bankruptcy, together with a more formal process for deciding when to use those tools," Bernanke said. "Because the resolution of a failing securities firm might have fiscal implications, it would be appropriate for the Treasury to take a leading role in any such process, in consultation with the firm's regulator and other authorities."