The financial sector saw choppy trading in the red Tuesday, ahead of the Federal Reserve's expected decision Wednesday to cut interest rates.

Among individual stocks, the Merrill Lynch ( MER) saga continued as CEO Stanley O'Neal finally turned in his resignation under pressure. The company's board has been reportedly floating names for his replacement since last week after O'Neal suggested a merger to his counterpart at Wachovia ( WB).

Board member Alberto Cribiore will fill in as nonexecutive chairman and head a committee to search for O'Neal's permanent successor. This is all in the wake of Merrill's dreadful third-quarter results , just issued last week, which reflected a far bigger loss than what the broker had predicted earlier this month.

Merrill shares had enjoyed a sizable rise since news broke Friday on O'Neal's likely departure, but on Tuesday they eased 2.3% to $65.86. That dampened the NYSE Financial Sector Index, which recently sank 0.3% to 9,286.21.

A number of fellow components were sliding on slipshod financials, among them futures-and-options broker MF Global ( MF). The Bermuda-based firm swung to a GAAP-based loss of $90.6 million, or 78 cents a share, from a year-ago profit. Stripping out one-time items, including costs related to its recent initial public offering, earnings totaled 42 cents a share to easily top Thomson Financial's 36-cent estimates. Still, shares lost 6.6% to $29.45.

PMI ( PMI) fell 8.3% after the mortgage insurer posted a loss of $1.04 a share to reverse year-ago earnings, even though this is a penny better than what it had predicted earlier this month. And Safeco ( SAF), a property and casualty insurer, shed 4.4% after missing targets by 4 cents with operating earnings of $1.51 a share.

Elsewhere, Pacific Capital Bancorp ( PCBC) plunged 15.8% on news that its third-quarter credit-loss provision will more than quadruple sequentially to $22.4 million, reflecting increased losses on its 2007 Refund Anticipation Loans. That should chop 27 cents a share off the bank's bottom line.

Pacific made these loans with the expectation that borrowers would repay with IRS tax refunds but, "with the larger number of refund claims being denied because of fraud," the Santa Barbara, Calif., bank now assumes they'll go unpaid. Shares were down $3.89 to $20.77.

Meanwhile, Brandes Investment Partners disclosed Monday that it had bought 45.7 million Countrywide ( CFC) shares as of Sept. 30 for a 7.9% stake. But the mortgage lender nonetheless slumped another 4.1% two trading days after it reported a big third-quarter loss . The stock initially had climbed on the promise of profitability in the fourth quarter and in 2008.

The KBW Bank Index was recently up around 0.3 points, or 0.3%, to 103.03.

On the other hand, Franklin Bank ( FBTX) was among the biggest price gainers after reaffirming its fourth-quarter guidance at between 34 cents and 36 cents a share, which would beat consensus by at least a penny. The Houston bank also came in 2 cents under analyst calls for the third quarter. Shares were up 7.2% to $7.58.

Asset manager Principal Financial Group's ( PFG) third-quarter operating profit, at $1.17 a share, was far better than expected, as was that of Axis Capital ( AXS). Principal shares climbed 2.2%, while Axis advanced 3.1%. Fellow insurer Hanover Insurance ( THG) was a penny over and authorized a $100 million share-repurchase program. Shares spiked 6.4%.