Thursday's Financial Winners & Losers

The financial sector's uncanny Wednesday climb faded into memory Thursday as Federal Reserve Chairman Ben Bernanke helped confirm some of the corrosive fears that have been plaguing the market of late, even as he voiced a bit of optimism on the U.S. economy's future.

In prepared testimony to the Senate Banking Committee, Bernanke said that his outlook "envisions an improving picture" -- gathering economic strength on the heels of "a period of sluggish growth" -- in contrast to the recession forecasts being issued by a number of analysts. Still, he warned, the possibility remains that "the housing market or the labor market may deteriorate to an extent beyond that currently anticipated, or that credit conditions may tighten substantially further." He also implied that, if necessary, the Fed would cut interest rates even further following the 225-point slashing it has already employed since September.

Treasury Secretary Hank Paulson agreed that this "difficult transition period" will entail slowing growth, not contraction, amid a torrent of hopeful intonations on the country's economic future. He particularly talked up the rebate plan that President Bush signed into law yesterday, which will bestow on individual taxpayers at least $300 each, as well as measures taken by federal government to stem the tide of foreclosures resulting from subprime-mortgage borrowers who have been unable to keep up with their payments.

"I have confidence in our markets," said Paulson. "They have recovered from stressful periods in the past, and they will do so again."

The NYSE Financial Sector Index responded by sinking 94.4 points, or 1.3%, to 7,449.95. The Amex Securities Broker-Dealer Index and the Nasdaq Financial 100 performed similarly.

In the ever-deepening bond-insurance saga, New York insurance superintendant Eric Dinallo says he might allow these firms to split into two companies -- one overseeing municipal bonds "and any other healthy parts of the business," and the other for "problem parts" like structured finance -- according to Dinallo's prepared remarks to the House Financial Services subcommittee on capital markets. "We cannot allow the millions of individual Americans who invested in what was a low-risk investment lose money because of subprime excesses," says Dinallo.

Bond insurers such as MBIA (MBI Quote) and Ambac (ABK Quote) have suffered immensely over the past few months as subprime exposures and resultant dwindling capital levels have endangered their crucial triple-A standings at the major credit-ratings agencies. Dinallo emphasizes, however, that his interest in saving these companies is "not for their own sake, but to protect first policyholders and second the markets and broader economy."

Per the prepared testimony, Dinallo also says that a government bailout isn't currently planned, but he highlights positive steps such as inviting Warren Buffett's Berkshire Hathaway (BRK.A Quote) firm to open a new bond-insurance outfit in New York and approving MBIA's capital-boosting plan "in record time."

In recent trading, MBIA shares were rising 48 cents, or 4.1%, to $12.12. Ambac was up 6.3% to $9.96, XL Capital (XL Quote) was ticking down 7 cents at $38.48, and XL affiliate Security Capital Assurance (SCA Quote) was off 8.2% to $1.67.

On the mortgage-insurance front, Freddie Mac (FRE Quote) announced that it will temporarily change its eligibility rules for private mortgage insurers, as of June 1, so as to allow approved companies to "retain more insurance premiums to pay current claims and re-build their capital base." Freddie shares fell 3% to $28.29.

Following that, mortgage insurer MGIC (MTG Quote) shares were adding 1.4% at $12.79 a day after it lost substantial ground on word of a big fourth-quarter loss, and PMI (PMI Quote) gained 1.4% to $7.34. But Radian (RDN Quote), which is scheduled to report earnings tomorrow morning, surrendered 5.3% to $6.94 in recent trading.

In earnings, Swiss bank UBS (UBS Quote) confirmed that it took a loss in the fourth quarter, as it had warned it would last month. The actual shortfall, which reverses a year-ago profit, came to around $11.34 billion (12.45 billion Swiss francs) -- a hair better than UBS's January estimate of $11.38 billion, based on recent conversion rates. Deutsche Bank downgraded UBS to hold from buy. Shares slid 7.1% to $34.35 on the NYSE.