Financial stocks were falling Wednesday morning, along with the broader markets, as investors continued to worry about whether the proposal to purchase up to $700 billion worth of banks' troubled assets would pass through Congress.

A report that manufacturing activity had contracted far further than expected, indicating that economic activity is rapidly slowing down, helped to push equities down as well. The NYSE Financial Sector Index was up 1.8% at 6,126.25, while the broader Dow Jones Industrial Average was off its low of more than 200 points, now down 0.1%, at 10,837.04.

Downey Financial ( DSL) fell sharply as investors continued to worry that its toxic loans may cause the bank to crumble or be bought on the cheap.

In the past few weeks, similar speculation about several banks led to stock declines and eventual collapses, government bailouts or fire-sale acquisitions. Lehman Brothers filed for bankruptcy in mid-September, and Bank of America ( BAC) agreed to buy Merrill Lynch on the same day. Soon after, the government saved American International Group ( AIG) from collapse with a $85 billion loan. The Federal Deposit Insurance Corp. then took over the troubled thrift Washington Mutual ( WM), selling its branches and deposits to JPMorgan Chase ( JPM) for a mere $1.9 billion.

This week, Citigroup ( C) struck a similar deal to acquire Wachovia's ( WB) banking assets.

But despite the sector's broad decline on Wednesday, some of the companies involved in those deals were rallying. AIG surged 16.8% to $3.89, BofA was up 7.7% at $37.72 recently, as JPMorgan gained 4% to $48.77 and Citi added 9% at $22.40.

Federal Agricultural Mortgage surged 60% to $6.55 after the company, also known as Farmer Mac, named a new chief executive and said it would raise $65 million through a preferred stock offering. Buyers of the new shares include firms that lend to the agricultural sector, like AgFirst AgriBank CoBank, Farm Credit Bank of Texas and U.S. AgBank. Zions Bancorp. ( ZION) is buying a $5 million stake.

Despite a credit-ratings cut from Moody's, Sovereign Bancorp ( SOV) was also up 17% at $4.64. But student-loan giant SLM ( SLM), also known as Sallie Mae, was dropping 24% at $9.38, on worries that the credit crisis will hurt its lending operations. On Monday, the company named new chief credit and lending officers.

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