Once again, Eliot Spitzer has floored the financial sector. But analysts don't expect the group to be on the canvas for long.

The New York state attorney general connected on his latest haymaker last week, suing giant insurance broker

Marsh & McLennan

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over an alleged kickback scheme. Thursday's knockdown slashed $9 billion in market cap from Marsh and also dragged down giant insurer

American International Group

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, which is cooperating with the probe.

The slide in Marsh, AIG and some other big insurance names punished the entire financial services industry, which also includes banks and brokers (a group hit hard by Spitzer's 2002 cleanup of Wall Street). Funds that track the sector have staggered, losing 2.41% on average over the last month. That dismal decline is exceeded only by those punching bags the health care funds, which are down 4.51% over the same span.

To be sure, Spitzer's blow is far from the only problem for the financial names. They were already on the ropes over the threat of higher interest rates, coupled with election-year economic uncertainty. Even so, financial services analysts remain bullish on the group, and many see bargains out there. These people see a generally healthy economy in which big finance companies such as


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J.P. Morgan Chase

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play a leading role.

"Pipelines look fine at the money-center banks and investment banks," says Anton Schutz, portfolio manager of the $226 million


Burnham Financial Services fund. "Deals will get done."

Schutz says healthier capital markets will be back after the election uncertainty is over. He thinks financial shares, which at 21% compose the largest group in the

S&P 500

, will benefit from an increase in businesses such as IPO and bond underwriting and corporate lending.

Deals may get done once a president is finally chosen, but the interest rate worries that caused a rash of redemptions in Schutz's and other financial funds in April of this year refuse to go away. The popular perception is that a rise in interest rates will stifle additional spending from an already taxed consumer, curb corporate lending and drop the final curtain on the housing/refinancing boom that has underpinned the recovery.

But financial services fund portfolio managers such as Schutz and David Ellison of the $30 million

( FBRFX)FBR Large Cap Financial fund don't see an outsize threat from rising rates.

Schutz says that economically sensitive companies do well in a rising rate environment and that the refinancing boom "is basically over anyway." He also reasons that the market often misses the fact that regional banks make more money when the


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raises rates, because they maintain low rates for checking account holders but charge more for loans.

Ellison takes a different tack by looking down instead of up.

"If rates go down any further, then banks will not lend money because they won't make any money," says Ellison. "That would be dangerous for the U.S. economy, which operates on credit."

Ellison is bullish on the banks, calling the fundamentals strong and credit quality very good despite "valuations being on the high side." When dissecting the financial sector, he favors "less complicated lenders" such as S&Ls and regional banks as opposed to investment banks and insurance companies. His top picks include under-the-radar names like




Golden West Financial

( GDW) and


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"Investment banks have too much leverage, and insurance companies are too complicated with their accounting and pricing issues," says Ellison. "Boring little banks are beautiful to me."

Judging by the consolidation in the banking sector, those little banks might not be so boring after all, and Ellison is definitely not the only one interested in them. Burnham's Schutz says there are 40% fewer banks since 1990, with the total dropping from 15,000 to 9,000 today. And he does not expect the consolidation game to stop, saying the industry is only in the "third inning."

But won't that eventually shrink the number of banks in the system to an unhealthy level? Not with over 10,000 credit unions in the U.S. waiting to become S&Ls and eventually public banks, says Schutz, who like Ellison tends to avoid insurers in favor of banks. His top holdings include regional players

People's Bank

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Sovereign Bancorp

( SOV).

He also likes mega-bank Citigroup, which he says has exposure in the right places such as corporate lending and stock underwriting, if the economy picks up. Moreover, he calls it a bargain at slightly less than 10 times its 12-month forward P/E ratio. That puts it squarely in the discount bin along with other money-center banks like J.P. Morgan and


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, which have forward multiples of 11 and 11.5, respectively, far below the group's typical trading range of 15 to 16.

Michael Holton, portfolio manager of the $363 million

(PRISX) - Get T. Rowe Price Financial Services Report

T. Rowe Price Financial Services fund, says the financial services sector -- aside from the insurers -- has held up rather well in the face of recent volatility, which he expects to end with the election. He gives a lot of the credit to the Fed for convincing the markets that it intends to stick to its "measured" plan to raise rates instead of spooking investors with a less transparent policy.

"Gradual short-term rate hikes, a pullback in oil prices and an end to the election are the three things that will be good for the financials as a group and the banks within that group," says Holton. "The exact reverse of which has been haunting the group over the past month."