Market Sinks With Foundering Bank Stocks

Updated from 9:47 a.m. EDT

Stocks in New York were dropping Thursday as swooning price action in financial-services shares sent waves of nausea up and down Wall Street, but the major averages had come off their worst levels.

The Dow Jones Industrial Average was losing 74 points to 11,195, and the S&P 500 was down 9 points to 1223. The Nasdaq was lower by 9 points to 2220.

Sellers were having their way with shares of Lehman Brothers (LEH) and Washington Mutual (WM), both of which continued to suffer on liquidity fears after taking heavy losses during Wednesday's trading.

The Wall Street Journal reported that Lehman CEO Dick Fuld over the past week has been calling other financial firms to ensure they were still trading with his company. Fuld lately has been fighting rumors that Lehman will follow Bear Stearns, Fannie Mae(FNM) and Freddie Mac (FRE) as the next victim of the credit crisis, the report said.

Analysts expressed extreme skittishness about the prospects for Lehman. Citigroup, Goldman Sachs and Oppenheimer all cut their ratings on the brokerage. Merrill Lynch replaced its neutral rating with "no opinion." Ratings agency Moody's said after the close Wednesday that Lehman will face a credit downgrade unless it partners with a stronger company. Lehman credit default swaps also rose sharply Wednesday. Lehman shares dropped 40% early.

Meanwhile, Washington Mutual was dropping 19% after Reuters reported that action in its credit default swaps reflected increasing fears about its capital levels. A Bloomberg report also indicated that new accounting rules may hurt the company's chances of finding a buyer.