Questions about inflation and further credit losses weighed on financial stocks Friday, despite gains early in the day on speculation the Federal Reserve would further cut interest rates.

The NYSE Financial Sector Index ended the day 0.1%, while the KBW Bank Index rose 0.6%. The Amex Securities Broker-Dealer Index rose 0.2%.

Washington Mutual ( WM - Get Report) sank 8.9% to close at a new 52-week low of $10.71. The Wall Street Journal reported on Friday that the Seattle lender was approaching private equity firms and sovereign funds in order to boost capital levels. Shares of mortgage lender IndyMac also fell 1.4% to $4.82.

Thornburg Mortgage plunged as much as 34.5% after the Santa Fe, N.M.-based jumbo lender said it was restating earnings for the two-year period of 2006 and 2007, while raising doubt about its ability to continue as a "going concern."

The restatement will include a $427.8 million charge to Thornburg's 2007 earnings because of the decline in value of some of its mortgage-backed assets. As of March 6, the company had outstanding margin calls of $610 million which significantly exceeded its available liquidity at that date, it said. The stock received a boost before the closing bell, though, after PIMCO Chief Investment Officer Bill Gross said on CNBC he had bought hundreds of millions of dollars in Thornburg debt. Shares closed up 8.5% to $1.75.

Bond insurer Ambac saw shares soar 28% to $9.50 after it detailed its plan to raise $1.5 billion, saying it will get nearly $1.16 billion of that by selling 171.1 million shares at $6.75 each. The underwriters received a 30-day option to purchase up to an additional 25.7 million shares.

Simultaneously, Ambac priced a $250 million public offering of 5 million equity units and also sold more than 14 million shares, raising $95 million, through a private placement with two financial institutions.

MGIC Investment ( MTG - Get Report) fell 6.3% to $13.50 on Friday. The company said earlier in the week that it planned to sell stock in order to raise capital, as well as exploring other means to boost its capital levels, according to a filing. The company expects to pay up to $2 billion in claims this year.

Shares of Citigroup ( C - Get Report), Merrill Lynch and Countrywide Financial were dipping after former Citi CEO Chuck Prince, ex-Merrill Lynch CEO Stanley O'Neal and Countrywide chief Angelo Mozilo appeared before the House Oversight Committee to discuss whether compensation practices at the three big firms were aligned with shareholder interests. The financial companies became the poster children for all that had gone wrong in the ensuing credit crunch and housing crisis as all took massive losses in 2007. Citi shares fell 1.2. Merrill sank 1.5%, while Countrywide ended the day down 2.5%.

In addition, the Financial Times reported that Citi is considering an executive reshuffling in its U.S. consumer unit. On Thursday, after the market close, the financial giant laid out plans to retool its mortgage operations.

One company that shined Friday was iStar Financial ( SFI), which surged 14.3% to $15.98. The New York-commercial real estate finance company announced a quarterly dividend of 87 cents a share for the first quarter.