Ambac Financial's

( ABK) plan to raise $1 billion through a stock offering disappointed investors hoping for a bailout, sending the financial sector and overall market plummeting Wednesday.

Ambac shares plummeted as much as 19.8% after saying it would sell $1 billion worth of its stock and $500 million in equity units in an attempt to add to its capital base to backstop losses to debt it insures. The move is designed to save its remaining triple-A credit ratings, critical for the company to win new business. More recently, the stock was down 14.2% to $9.20.

Larger rival


(MBI) - Get Report

, which has raised $2.6 billion in new capital so far, also sank 4% on the news to $12.46. The


Financial Sector Index slipped 43.34 to 7,160.76.

Ratings changes also were weighing on stocks negatively. Citigroup downgraded the U.S. specialty finance real estate investment trust sector, saying the credit market dislocation appears to be intensifying and the credit overhang may be too big for the

Federal Reserve

to solve in the short term. Stocks in the sector were downgraded to hold from buy. They include

iStar Financial


, which dropped 43 cents to $16.35;

Gramercy Capital

( GKK), which descended 66 cents to $17.60;

KKR Financial


, which lost 93 cents to $13.04; and

NewStar Financial


, which fell 42 cents to $5.16.

An upgrade from Morgan Stanley wasn't enough to revive mortgage lender

Fannie Mae

( FNM). Based on the lower valuation of the stock, the analyst moved the rating to equal-weight from underweight, although the mortgage sector was cut to cautious from in-line.

Freddie Mac

( FRE) was maintained at equal-weight and is preferred by the analyst over Fannie. Freddie was trading at $21.48 down 4.9% and Fannie fell 6.3% to $24.32.


( CCRT) stock slipped 6.3% to $9.32 after a Jefferies & Co. analyst downgraded the lender to hold from buy, saying more of its borrowers are failing to repay their debts. The Atlanta-based company issues credit cards and car loans to consumers with questionable credit histories.

Among the few winners, mortgage insurer


(MTG) - Get Report

ticked up 1.1% to $14.34. On Monday, the company said in a regulatory filing that it planned to sell stock in order to raise capital, as well as exploring other means to boost its capital levels. The company expects to pay up to $2 billion in claims this year.

Brokerage deals continue to get done with

Bear Stearns

( BSC) seeing a rise in share price after

CITIC Securities

announced it was negotiating to take its stake in Bear to just under 10%. Bear was up, but more recently was falling 1.9% to $79.74. Also,

Ladenburg Thalman Financial Services

(LTS) - Get Report

said it has agreed to buy Punk, Ziegel & Co., a New York City specialty investment bank, for an undisclosed amount. The Miami-based investment bank was up 4% to $1.81.