Bond insurer

Ambac Financial

( ABK) plummeted on a worse-than-expected first-quarter loss Wednesday, weighing on financial stocks..

Ambac closed down 42.6% to $3.46, declining $2.57, after admitting it suffered a $1.66 billion first-quarter loss. Citing devalued collateralized debt obligations on its books and deals that it expected to write off, Ambac tried to reassure investors that it was not going to go bankrupt and that it will weather the crisis of confidence. Fellow bond insurer

MBIA

(MBI) - Get Report

traded down in sympathy losing 33.8% to $8.79.

The struggling student loan market received positive signs that the Bush administration would back a measure aimed at bolstering student lender's finances.

SLM Corp.

(SLM) - Get Report

, the nation's largest lender better known as Sallie Mae, crumbled on the news. The stock dropped 6.8% to $16.44 after officials dismissed the possibility of the Federal Financing Bank, a Treasury Department unit, playing a role in any intervention in the $85-billion market. Sallie Mae had been pushing for that intervention.

Fifth Third Bank

(FITB) - Get Report

continued its slide despite some positive analyst estimate, falling another 4.9% to $19.90. A BMO Capital Markets analyst upgraded the bank on Wednesday to outperform from market perform and raised the stock's target price to$28, believing there is light at the end of the tunnel.

Weak earnings and an analyst downgrade also sent shares of

Ameriprise Financial

(AMP) - Get Report

tumbling. A Wachovia analyst cut the bank's rating to market perform from outperform after the asset manager reported a first quarter profit that was less than what Wall Street had been expecting. The stock slid 6.4% to $47.05 a decline of $3.24.

Merrill Lynch

( MER) gave back 3.4% to $44.91 after it sold $2.55 billion in non-cumulative perpetual preferred shares late on Tuesday. The big brokerage also beginning layoff discussions with London employees according to

Reuters

.

The NYSE Financial Sector index was down 48.98 to 7,475.74.

But it wasn't all bad in the world of finance. Insurance company

Safeco

(SAF) - Get Report

agreed to be bought by

Liberty Mutual

for $6.12 billion, or $68.25 per share. The deal would create the country's fifth-largest property and casualty insurer. Liberty Mutual, which is owned by its policyholders, said there are no financing conditions on its offer and plans to use its available cash for the purchase. Safeco skyrocketed 45.8% to $65.94, advancing $20.71 cents.

Raymond James

(RJF) - Get Report

shares jumped 20% to $27.56, a gain of $4.60. The regional brokerage's first-quarter earnings, unveiled after Tuesday's bell, have risen and results exceeded analysts' expectations. CEO Thomas James said the struggling financial markets have seen the worst of the current crisis, "although the damage to the financial services industry is not yet over."

And finally,

Moody's

(MCO) - Get Report

said quarterly profits decreased less than expected as cost-cutting helped offset a steep slide in demand for its credit ratings. Structured finance deals have been limited since the credit market turmoil began causing fewer transactions, hitting the rating agency's fees. The stock jumped 95 cents, or 2.6%, to $37.46.