"Hopefully, they're the last two shoes to drop," Schrader said.
(How many banks could fail before this is all over? Click on the video at left.)
Hedge-fund manager Jim Chanos, who makes money betting that companies' stock prices will fall, said financial stocks have probably seen the worstand his fund has fewer short positions now than it did in the past.
Lehman Brothers shares, which shed more than 50 pecent in the first three days of the week, dropped another 42 percent to end the day at $4.22 amid speculation that Lehman is now actively shopping the entire firm and that it could be bought by a big bank within days. The stock has taken a beating as the firm has failed to reassure investorsof its ability to do anything it has promised, from raising capital, to selling its asset-management unit or selling the entire firm.
On Wednesday, a slew of firms, including JPMorgan, Wachovia, Goldman Sachs, Citigroup and Sanford Bernstein widened their projected losses for Lehman and cut their price targets on the stock.
Sanford asserted that Lehman would not suffer a similar washout as Bear Stearns experienced.
Bank of America did an about face, finishing up 2 percent, as the bank has been bandied about as a potential suitor for Lehman. Of course, Bank of America is already saddled with Countrywide and it might not want to take on Lehman, too.
Some market pros suggested that the late rally was due to a report that Lehman was courting suitors, including bank of America.
The market turned sharply because of the "Wall Street Journal story speculating that BofA is involved in takeover discussions with Lehman," Doug Kass, founder and president of hedge fund Seabreeze Partners Management, told Reuters.
AIG squeaked in with a 0.3-percent gain by the closing bell, after earlier being one of the biggest drags on the Dow.
Washington Mutual shares, which have been under increasing pressure since the firm ousted its CEO on Monday, were among the biggest surprises in the late rally, surging 22 percent to close at $2.83. Earlier, the stock sank below $2 for the first time since 1990 as investors increasingly worry that the largest U.S. savings & loan might not be able to raise enough capital or find a buyer. On Wednesday, Standard & Poor's slashed its outlook for the bank.
WaMu shares have shed 92 percent of their value in the past 52 weeks.
(Should you dump shares of Lehman and WaMu? Click here to find out what the market pros say.)
Merrill Lynch fell 17 percent and Wachovia skidded more than 5 percent.
JPMorgan , one of the only financials that was up all day, ended up 5.7 percent.
In economic news, jobless claims fell by 6,000last week, less than expected. Continuing claims hit their highest level since October 2003. Separate reports showed import prices fell 3.7 percentand export prices skidded 1.7 percent, both worse than expected, while the trade gap widened by 5.7 percent to $62.2 billion, its widest in 16 months.
Crude oilsettled at $100.87 a barrel. The pressure of a rising dollar and concerns about global demand see-sawed against earlier bullish news that OPEC had agreed to cut output by about 500,000 barrels per day. London Brent crude actually fell below the $100 mark.
United Airlines' parent UAL jumped 12 percent, providing the biggest boost to the Nasdaq, as airlines rallied on the drop in crude prices.
General Motors shot up 12 percent, making it the Dow's best performer, after JPMorgan said it's becoming increasingly likely that the federal government will provide loans to the industry, easing liquidity concerns. Separately, the government is apparently pressuring the company to absorb $1.5 billion in pension obligations of parts producer Delphi, the Wall Street Journal reported.
Sirius XM Radio was one of the biggest drags on the Nasdaq after the company warned that revenue and subscriber growth in 2009 would fall short of analysts' expectations.
Apple eked out a gain after it debuted its thinnest iPod ever this week. Rival Research In Motion advanced 4.5 percent amid rumblings that its readying a BlackBerry assault of its own, including the first fold-up BlackBerry and even a touch-screen BlackBerry. The U.S. release of the next generation, the BlackBerry Bold, which will be faster and have an mp3 player, camera and video recorder, has been delayed until October. (Read Jim Goldman's blog post on his interview with RIMM's CEO.)
In earnings news, Campbell Soup gained 3.8 percent after the company reported its profit jumped 31 percent as price increases and new products such as low-sodium soups helped offset high commodity prices. The company, which makes everything from soup to Prego pasta sauce, V8 juices and Pepperidge Farm cookies, also said sales growth in the just-started 2009 fiscal year should top its forecast.
CSX shot up 11 percent after the railroad raised its forecast for 2008 and beyond, citing further room for pricing growth and industry momentum. The company now expects 2008 earnings of $3.65 to $3.75 a share, up from its prior estimate of $3.40 to $3.60 a share, and pegs growth through 2010 that is 20 to 25 percent higher than that, up from its initial estimate of 18 to 21 percent growth.
Today is the seventh anniversary of the Sept. 11 attacks. The New York Stock Exchange held a moment of silence at 9:25 a.m. ET to remember the victims. Nasdaq held its moment of silence at 10:29 a.m.
STILL TO COME:
FRIDAY: Producer prices; government reading on retail sales; business inventories; consumer sentiment
Send comments to firstname.lastname@example.org.