Editor's note: Our "On the Brink" series will provide daily insight into the financial firms facing capital shortfalls and the growing pressure from short-sellers in the market.

That

Lehman Brothers'

(LEH)

stock is under assault is not in question. Who is most responsible for the firm being on the brink of collapse, however, is a topic of much fiercer debate.

Lehman Brothers

shares closed down 41.8% to $4.22 Thursday, and traded as low as $3.79 earlier in the day, as several analysts downgraded the shares, citing a lack of confidence about the company's strategic initiatives and even the firm's viability.

The session prolonged months of declines for the beleaguered stock. Terms like "uncertainty," "confidence issues," "perception of weakness" and the need to "turn around market sentiment" pervaded analyst reports, despite the fact that some, like Ladenburg Thalmann analyst Richard Bove, still see great value in Lehman.

"Outsiders driven by as much ill-advised conviction as they had in the belief that the Internet had eliminated negative economic cycles, the likelihood of housing prices never falling, and the credit derivatives market eliminating risk in subprime securities are focusing their biggest guns on Lehman Brothers," Bove said in a Thursday note on the firm.

Bove's is a thinly veiled reference to short-sellers, the standard bogeyman in times of panic on Wall Street. Shorts bet on a stock to fall by borrowing shares and selling them in the hopes that prices decline before they have to sell them back to the original owner.

Defenders say they help keep bubbles in check by tempering enthusiasm. On the other hand, critics charge shorts have been on a spree, taking down one financial firm after another this year with whisper campaigns to spread negative information.

That camp reportedly includes Lehman CEO Richard Fuld, who has called executives at competing firms to complain that their brokers were hyping bad news to push Lehman shares lower, according to a report in

The Wall Street Journal

.

Whether that is the case, it is almost certain that shorts have helped to drive down shares in an exacerbated manner as panic swept the markets. The evaporation of confidence -- in the wake of billions of dollars in losses and other missteps -- has also helped to take down

Bear Stearns

,

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

, all of which were ultimately valued at $2 a share or less, a tiny fraction of prices just months earlier.

The most recent report from the

New York Stock Exchange

shows that short interest in Lehman declined in the second half of August, while such positions in Fannie and Freddie surged about 30%. The federal government last weekend seized the two government-sponsored mortgage giants, basically ending their run as public companies.

Now that Fannie and Freddie have been taken down, the next NYSE report may show that shorts have set their sights squarely on Lehman.

The first indication of short-sellers' interest in the firm came last spring, as Lehman was still garnering praise from analysts and the media as being one of the few Wall Street banks to escape from the housing and credit crises with minimal damage. But on May 21, hedge fund manager David Einhorn became vocal about his short position, after noticing a footnote on Lehman's quarterly report indicating that it might have billions of dollars in writedowns ahead.

Confidence began to evaporate once Lehman started facing up to the results Einhorn predicted, with a $2.8 billion second-quarter loss. Lehman started off May at around $45.

While the

Securities and Exchange Commission

in July put in place temporary restrictions on "naked" short-selling -- selling shares short before borrowing them from another party -- and has vowed to investigate reports of rumor-mongering, its efforts have done little to stem Lehman's precipitous decline.

Short interest in Lehman reached a height of about 4.4% in mid-May, when the price was near $45. Of course, naked short interest, which can't be measured, isn't included in that total. And even as the SEC's naked short ban went into effect in July, limiting short interest, Lehman's stock continued to plummet.

In a client note on Thursday, Bove recognized that Lehman's dramatic stock spiral is being "driven by mass hysteria." He maintained a buy rating on Lehman, calling it "one of the best firms on Wall Street" and incredibly undervalued. He noted that its current market value below $5 billion represents a price that "even the National Bank of Kazakhstan can afford."

But the question remains as to whether such "outsiders" Bove blamed for driving the stock down are arsonists who set fires at companies that could have withstood the housing- and credit-market meltdowns, or whether they are simply kindling a blaze that would have devoured the firms anyway, merely at a slower pace.

On one hand, says Mark Coffelt, president and chief investment officer of Empiric Funds, rumors of a firm's impending demise wouldn't have legs if there weren't an utter lack of confidence to begin with.

"Shorting is not what caused the problem with Bear Stearns; it didn't cause the problem with Lehman and it's certainly not the problem with Fannie and Freddie," says Coffelt, whose fund has both long and short positions. "Fannie and Freddie are technically bankrupt and that's why the stocks are so low."

Coffelt made those comments about a week before the government intervened to take over the mortgage giants.

On the other hand, there is great potential for stock manipulation in a hypersensitive, panic-driven market -- one in which a false report of United Airlines' bankruptcy sent its shares down more than 75% in a single session. While United's parent company

UAL's

(UAUA)

drop was the result of

accidental misinformation

, underhanded forces can use the same kind of misinformation to make robust profits. And companies outside the financial sector can arguably withstand rumor campaigns better, because their business transactions don't rely as heavily on the market's confidence.

"Their ability to access capital on a timely basis may be more important than other industries'," Eric Marshall, portfolio manager and director of research at Hodges Capital Management, says of financial firms. "If you artificially knock down those stock prices, then you artificially knock up the cost of capital at the time when they most need the capital."

Financials are facing many headwinds in today's market, in which short-selling garners six times as much interest as it did a decade ago, according to

ShortSqueeze.com

. That factor, combined with a proliferation of electronic trading and hedge funds -- which can hasten the trajectory of stock movements by the sheer size of their trades -- creates a situation where time is of the essence.

"Lots of information floats around about the health of a company from one financial organization to another," says Scott Stewart, a finance professor at Boston University. "So much of the business is based on trust and confidence that a company's fortunes can change overnight."

Stewart notes that it's not the first time the financial sector has been engulfed by a lack of confidence, though it may be the first time doubt has swept it so hard and so fast. Unless regulators take dramatic steps to change the rules behind short-selling and stock declines, financials will have to learn to operate better in this new environment, he says.

While Bove says it would be smarter for Lehman to weather the storm and not succumb to fire-sale asset prices, he also recognizes that the market won't support such a strategy. Lehman, he says, must take action to survive.

"It would be a great mistake to break this company up due to another frenzy in Wall Street," he writes. "However, a man living in a concrete house in a hurricane may believe he is safe just before the floods develop and he drowns."