Financial Winners & Losers: Lehman Brothers

Weak home-sales data and reports that a South Korean bank has decided not to invest in Lehman Brothers(LEH) sent financial shares spiraling downward Tuesday.

Declines of more than 2% in the NYSE Financial Sector Index reversed healthy gains in the previous session, which was the first trading day following the government bailout of Fannie Mae(FNM) and Freddie Mac(FRE). The sector mirrored losses in the broader markets, with the Dow Jones Industrial Average down 1% and the S&P 500 down 1.5%.

A combination of factors was weighing on financial stocks. The National Association of Realtors reported a bigger-than-expected 3.2% drop in pending home sales in July, heightening fears that cheaper homes and lower mortgage rates might not improve the housing market, the main issue weighing on banks. Dow Jones also reported that a South Korean banking official said talks between Korea Development Bank and Lehman had ended without a deal.

Lehman shares fell as much as 43% to $8, the lowest level in about a decade, as investors wondered where -- or whether -- the investment bank would find the capital it needs to continue operations. Recently Lehman pared some of those losses, trading down 32.5% at $9.55.

Inadequate capital and the extent of housing- and credit-related losses remain the key issues financial firms are grappling with. Washington Mutual(WM) also continued to plunge Tuesday, dropping 20.4% to $3.28 recently. The savings and loan's stock fell 3.5% on Monday after WaMu, which has been suffering from bad housing bets, removed CEO Kerry Killinger from his post.

Wachovia (WB) shares traded nearly 10% lower following a downgrade from a Merrill Lynch analyst, who cited an outlook for further weakness as the bank continues to cope with housing and credit losses.