Lehman Brothers Again Hit by Credit Fears - TheStreet

Lehman Brothers Again Hit by Credit Fears

The investment bank sinks to an eight-year low on a rumor, later denied, that bond giant Pimco was curtailing trading with the firm.
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Updated from 12:41 a.m. EDT

Shares of

Lehman Brothers

(LEH)

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)

and

Freddie Mac

(FRE)

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) - Get Report

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.

"

In 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."

Paulson told legislators that "financial institutions must be allowed to fail" to ensure market discipline.

"To do this, we will need to give our regulators additional emergency authority to limit temporary disruptions," Paulson said. "These authorities should be flexible, and -- to reinforce market discipline -- the trigger for invoking such authority should be very high, such as a bankruptcy filing."

Lehman last month reported a $3 billion loss for its second quarter, leading to the dismissal of its CFO and COO. The firm has been the target of short-seller Greenlight Capital's David Einhorn, who has accused it of masking losses.

The firm also was not helped by Fannie and Freddie, both of which were plummeting amid mounting concerns about their viability. Weakness in the mortgage market will continue to weigh on financial firms like Lehman who hold significant structured finance products tied to mortgages that already have declined sharply in value and have proven difficult to trade during the credit crunch.

This article was written by a staff member of TheStreet.com.