Financial stocks forged higher on Thursday, still feeling the euphoric effects of the Federal Reserve's gargantuan rate cut two days ago, even as the bad news continued to pile on.

The NYSE Financial Sector Index was recently climbing 84 points, or 1.1%, to 7,767.88.

Providing some support, following news that wasn't completely abominable, was credit-card company Capital One ( COF). The McLean, Va., firm reported that fourth-quarter income plunged 42% year over year to $226.6 million, or 60 cents a share, though that misses analyst estimates by a mere 3 cents, according to Thomson Financial. Capital One had warned of the income drop a couple of weeks ago.

Excluding costs from shutting down its GreenPoint Mortgage business, earnings suffered a less severe fall -- a scant 20% -- to $321.6 million, or 85 cents a share. Capital One shares were jumping $3.69, or 8.4%, to $47.89.

California mortgage lender IndyMac ( IMB) was cut to junk status at Fitch Ratings a day after Moody's decided to drop coverage of the company, but shares were still spiking 15.1% to $5.02. And National City ( NCC) was rising 4.3% after the Ohio bank upped its convertible bond offering by 25% to $1.25 billion, with an underwriter's option for another $187.5 million worth to cover overallotments. The offering was initially announced after the close on Tuesday.

Asset manager Janus Capital ( JNS), meanwhile, climbed 9.3% to $27.87 after continuing-operations income -- which strips out the shrinking value of its printing business -- came to $61.6 million, or 36 cents a share, against Street estimates for 32 cents a share. On a net basis, the Denver firm's income fell 21.2% vs. last year to $29.7 million, or 17 cents a share.

Elsewhere in the green, small-loan purveyor World Acceptance ( WRLD), of Greenville, S.C., saw shares soar 24.7% to $28.75 after it eked out a year-on-year profit climb of 4% to $7.3 million, or 43 cents a share, in the fiscal third quarter. That includes a special tax charge of 9 cents a share. Analysts were looking for 46 cents a share, excluding items.

But heavily on the losing side was bond insurer Security Capital Assurance ( SCA), which last night abandoned its plan to raise cash and got hit with a harsh Fitch downgrade today, to A from the prior pristine AAA rating. SCA said it's still pursuing other components of the capital plan it had announced last month, among them reinsurance arrangements and the restructuring of certain insured obligations.

But, said CEO Paul Giordino, "The unprecedented uncertainty and instability affecting our industry make it impractical to consider raising new capital at the present time." Shares of the Bermuda-based firm were diving 30% to $2.64.

Close SCA affiliate XL Capital ( XL), also of Bermuda, lost 2% to $45.41 after saying its investment in SCA, along with generally awful market conditions, will help propel it into a fourth-quarter loss of between $1 billion and $1.2 billion.

Mortgage investor Annaly Capital Management ( NLY), which priced a 51-million-share offering at $19.25 a share, saw its stock take a steep slide before recently recovering to a 0.4% loss at $19.60. Proceeds from the deal, which includes an underwriters' option for another 7.65 million shares, are intended for buying mortgage-backed securities, among other things.

Legg Mason ( LM), a Baltimore-based asset manager, lost 2.8% to $72.40 on a cut to underperform at Credit Suisse.

California bank Downey Financial ( DSL) spent most of the day down after Moody's put it on review for downgrade, saying that a "substantial" deterioration in the California real estate market could force it into a 2008 loss due to a cumbersome loan-loss provision. The move follows yesterday's report of a big fourth-quarter loss at the bank. Moody's currently has Downey's financial-strength rating at C-minus, issuer rating and long-term deposits at Baa1, and short-term deposits at P-2. Downey shares fell 4.5% to $28.19.

And, back in earnings, Sovereign Bancorp ( SOV) fell short of Wall Street expectations for the fourth quarter, reporting a plummeting operating profit of $94 million, or 18 cents a share -- 4 cents shy of EPS views. A year earlier, the Philadelphia-based bank made 33 cents a share on that same basis. Sovereign had announced earlier this month that it would take hefty goodwill-impairment charges, though they ended up totaling $1.577 billion vs. the original $1.4 billion projection. Soverign shares fell 10% to $10.

Also as previously announced, the bank lost $180 million pretax on investments in Fannie Mae ( FNM) and Freddie Mac ( FRE) preferred stock, and its credit-loss allowance was set at $737.7 million.