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Financial stocks edged higher Tuesday, shrugging off a $2.19 billion first-quarter loss from mortgage lender

Fannie Mae

( FNM).

The government sponsored mortgage buyer also announced it would cut its dividend and raise $6 billion in new capital, saying it fully expected the housing crisis to continue into next year. The Office of Federal Housing Enterprise Oversight, however, said it would lift a two-year-old consent order imposed on the company after an accounting scandal and would lower its capital requirement to 15% from 20% after it raised the money. Shares slumped in early trading, but then they turned around and closed up 8.9% to $30.81.

Fellow government-sponsored mortgage lender

Freddie Mac

( FRE), which reports earnings next week, traded in tandem and closed up 7.1%. The


Financial Sector Index declined in the morning session, but closed up a modest 34.94 to 7,937.42.

Citizens Republic Bancorp

( CRBC) shot up 16.9% to $7.78 after the bank was upgraded to outperform by Keefe Bruyette and Oppenheimer.

Elsewhere, real estate investment trust



beat analyst expectations by a penny due to a decrease in its provision for loan losses. The stock jumped 7.6% to $15.78, a gain of $1.11.

Shares of

TheStreet Recommends

Argo Group International Holdings


jumped after the international underwriter of specialty insurance and reinsurance products reported rising profits. First quarter net income increased 47% to $36.9 million, sending shares higher by $2.33 to $37.78.

That wasn't the case for


(LAZ) - Get Lazard Ltd Class A Report

. The advisory firm's first-quarter earnings plunged 71% as revenue declined due to slowing merger activity. Shares lost 5.4% to $35.46 as the Bermuda-based firm forecast a dismal 2008.

U.S. money manager

Legg Mason

(LM) - Get Legg Mason, Inc. Report

fell 10.3% to $56.30 after reporting its first loss ever. The company was forced to bail out money market funds that were exposed to risky securities.

Swiss bank


(UBS) - Get UBS Group AG Report

announced a loss of $10.9 billion and said it will cut 7% of its employees and dump $15 billion of its subprime and mortgage-based securities out of its portfolio. Shares closed down 54 cents to $33.77.

Merrill Lynch

( MER) shares were down fractionally after the firm disclosed in a regulatory filing that "various governmental entities" have requested information regarding the recent failures in the auction rate securities market. The firm said it intends to "vigorously defend itself" in two lawsuits in U.S. District Court claiming it failed to disclose materials facts about the securities when the market ran into trouble earlier this year. Shares closed down 5 cents to $51.35.

Countrywide Financial

( CFC) also closed down fractionally after the mortgage lender defended its bankruptcy servicing practices before a Senate subcommittee. Shares finished down 2 cents to $5.34.