The financials got whacked again yesterday — taking the market down along with it — on news of further debt downgrades from Standard & Poor’s.

On the i-bank side, Lehman, Merrill and Morgan all saw their credit ratings take a hit. On the commercial bank side, Wachovia and Washington Mutual said sayonara to their current leaders. This implies more bad news in the pipeline.

About a month ago, your humble editor compared Western banks to an old radio filled with cockroaches. (See Banks a Lot archived on the TPG Web site.) Four weeks later, the roaches are still pouring out.

At various times in the past few months, Taipan Daily has pounded the table for shorts on the broader financials. Those shorts are working well now, with XLF (the financial SPDR) trending lower in stair-step fashion and the Philly Bank Index ($BKX) testing its lows.

But in terms of keeping a finger on the pulse, the new bellwether for financial stocks just might be Lehman Brothers (LEH:NYSE).

Lehman is the smallest bulge-bracket investment house on the Street now that Bear Stearns is no more. Many thought it would follow in Bear’s footsteps during the heat of the crisis. (That’s where that big downward spike came from in early Feb.)

So far, Lehman has defied its critics — thanks in part to the smart moves of CFO Erin Callan and CEO Dick Fuld. But the sharks are still circling, and some very smart people think Lehman is still teetering on the brink.

The sharks smelled blood in the water this morning, as news arose that Lehman may be forced to raise billions in fresh capital to shore up its balance sheet.

The big question is how much exposure the investment bank still has to toxic mortgage trades and so-called “level 3 assets” — opaque stuff holdings that are extremely hard to value.

Watch LEH and the $BKX. If one or the other cracks, there could be another big downward whoosh for the financials. (“Whoosh,” of course, being a highly technical trading term.)

Buy One, Get One Free

Meanwhile, the housing bust is still in full swing. The above chart was featured in a recent Chart of the Day, but is worth reposting for those of you who didn’t catch it.