Hawkish comments from a

Federal Reserve

official and the specter of added regulatory scrutiny for investment banks weighed on financial stocks Wednesday.

Kansas City Fed President Thomas Hoenig, in a speech late Tuesday, stoked fears by suggesting the central bank should consider raising rates to combat inflation.

At a Senate hearing Wednesday, a

Securities and Exchange Commission

(SEC) said the agency is scrutinizing the liquidity of investment banks it supervises, including their plans for raising new capital.

Merrill Lynch

( MER) lost 5.6% to $48.48;

Morgan Stanley

(MS) - Get Report

shares fell 3.8% to $47.21;

Lehman Brothers

( LEH) ticked down 6.1% to $43.50; and

Goldman Sachs

(GS) - Get Report

declined 3.9% to $189.94.

American Express

(AXP) - Get Report

shares shed 4.4% to $48.70, making it among the biggest losers in the Dow Jones Industrial Average.

In the broader financial sector, stocks were pressured to the downside, as the

NYSE

Financial Sector Index dropped 232.10 to 7,705.32.

Poor housing data dragged shares of mortgage lender

Fannie Mae

( FNM) down 5.7% to $29.05. Prepayments on mortgage-backed securities dropped in April from March levels as home loan refinancing activity dropped.

Shares of

National Financial Partners

(NFP)

plummeted 20%, even after distributor of financial services products posted a profit of $10 million in the first quarter, vs. $8.5 million in the year-ago period. The stock was lost $5.61 to $22.46.

ProAssurance

(PRA) - Get Report

shares fell 8.1% after the property and casualty insurance company reported first-quarter net income of $35 million, down from the previous year's $36 million. The profits disappointed analysts concerned about lower earned premiums. Shares fell $4.35 to $49.25.

But it wasn't all doom and gloom for financial stocks. Regional broker

SWS Group

(SWS)

jumped 14.6% to $16.02 after reporting its fiscal third quarter. The Dallas-based firm recorded increases in net income, EPS and net revenues after the market closed on Tuesday.

Private equity firm

American Capital Strategies

(ACAS)

also saw shares rise on a first-quarter earnings beat. Even though the quarter was a losing one, the operating earnings and revenue came in ahead of analyst estimates. The loss came as a result of accounting rules forcing American Capital to price its investments based on fair market value and not internal models. The stock gained 2.5% to $31.29.

And finally, an analyst upgrade lifted

MF Global

( MF) 2.9% to $14.53. A Lehman analyst upgraded the stock to overweight, saying its current price had taken into account the losses incurred by a rogue trader.