UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 13G/A

Under the Securities Exchange Act of 1934

(Amendment No. 2)*

DOWNEY FINANCIAL CORP.

(Name of Issuer)

COMMON STOCK, $0.01 PAR VALUE

(Title of Class of Securities)

261018105

(CUSIP Number)

DECEMBER 31, 2008

(Date of Event Which Requires Filing of this Statement)

Check the appropriate box to designate the rule pursuant to which this Schedule is filed:

¨ Rule 13d-1(b)

x Rule 13d-1(c)

¨ Rule 13d-1(d)

* The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter the disclosures provided in a prior cover page.

The information required in the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

CUSIP No. 261018105 13G/A Page 2 of 14 Pages

1.	NAMES OF REPORTING PERSONS I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)             Highfields Capital Management LP
2.	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS) (a)  ¨ (b)  x
3.	SEC USE ONLY
4.	CITIZENSHIP OR PLACE OF ORGANIZATION             Delaware

NUMBER OF   SHARES   BENEFICIALLY   OWNED BY   EACH   REPORTING   PERSON   WITH	5.    SOLE VOTING POWER             1,675,074
	6.    SHARED VOTING POWER             —0—
	7.    SOLE DISPOSITIVE POWER             1,675,074
	8.    SHARED DISPOSITIVE POWER             —0—

9.	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON             1,675,074
10.	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (9) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)	¨
11.	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 9             5.8%
12.	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)             PN

CUSIP No. 261018105 13G/A Page 3 of 14 Pages

1.	NAMES OF REPORTING PERSONS I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)             Highfields GP LLC
2.	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS) (a)  ¨ (b)  x
3.	SEC USE ONLY
4.	CITIZENSHIP OR PLACE OF ORGANIZATION             Delaware

NUMBER OF   SHARES   BENEFICIALLY   OWNED BY   EACH   REPORTING   PERSON   WITH	5.    SOLE VOTING POWER             1,675,074
	6.    SHARED VOTING POWER             —0—
	7.    SOLE DISPOSITIVE POWER             1,675,074
	8.    SHARED DISPOSITIVE POWER             —0—

9.	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON             1,675,074
10.	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (9) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)	¨
11.	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 9             5.8%
12.	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)             OO

CUSIP No. 261018105 13G/A Page 4 of 14 Pages

1.	NAMES OF REPORTING PERSONS I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)             Highfields Associates LLC
2.	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS) (a)  ¨ (b)  x
3.	SEC USE ONLY
4.	CITIZENSHIP OR PLACE OF ORGANIZATION             Delaware

NUMBER OF   SHARES   BENEFICIALLY   OWNED BY   EACH   REPORTING   PERSON   WITH	5.    SOLE VOTING POWER             1,675,074
	6.    SHARED VOTING POWER             —0—
	7.    SOLE DISPOSITIVE POWER             1,675,074
	8.    SHARED DISPOSITIVE POWER             —0—

9.	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON             1,675,074
10.	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (9) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)	¨
11.	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 9             5.8%
12.	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)             OO

CUSIP No. 261018105 13G/A Page 5 of 14 Pages

1.	NAMES OF REPORTING PERSONS I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)             Jonathon S. Jacobson
2.	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS) (a)  ¨ (b)  x
3.	SEC USE ONLY
4.	CITIZENSHIP OR PLACE OF ORGANIZATION             United States

NUMBER OF   SHARES   BENEFICIALLY   OWNED BY   EACH   REPORTING   PERSON   WITH	5.    SOLE VOTING POWER             1,675,074
	6.    SHARED VOTING POWER             —0—
	7.    SOLE DISPOSITIVE POWER             1,675,074
	8.    SHARED DISPOSITIVE POWER             —0—

9.	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON             1,675,074
10.	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (9) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)	¨
11.	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 9             5.8%
12.	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)             IN

CUSIP No. 261018105 13G/A Page 6 of 14 Pages

1.	NAMES OF REPORTING PERSONS I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)             Richard L. Grubman
2.	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS) (a)  ¨ (b)  x
3.	SEC USE ONLY
4.	CITIZENSHIP OR PLACE OF ORGANIZATION             United States

NUMBER OF   SHARES   BENEFICIALLY   OWNED BY   EACH   REPORTING   PERSON   WITH	5.    SOLE VOTING POWER             1,675,074
	6.    SHARED VOTING POWER             —0—
	7.    SOLE DISPOSITIVE POWER             1,675,074
	8.    SHARED DISPOSITIVE POWER             —0—

9.	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON             1,675,074
10.	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (9) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)	¨
11.	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 9             5.8%
12.	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)             IN

CUSIP No. 261018105 13G/A Page 7 of 14 Pages

1.	NAMES OF REPORTING PERSONS I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)             Highfields Capital III L.P.
2.	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS) (a)  ¨ (b)  x
3.	SEC USE ONLY
4.	CITIZENSHIP OR PLACE OF ORGANIZATION             Cayman Islands

NUMBER OF   SHARES   BENEFICIALLY   OWNED BY   EACH   REPORTING   PERSON   WITH	5.    SOLE VOTING POWER             1,675,074
	6.    SHARED VOTING POWER             —0—
	7.    SOLE DISPOSITIVE POWER             1,675,074
	8.    SHARED DISPOSITIVE POWER             —0—

9.	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON             1,675,074
10.	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (9) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)	¨
11.	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 9             5.8%
12.	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)             PN

CUSIP No. 261018105 13G/A Page 8 of 14 Pages

Item 1(a).	Name of Issuer:
	Downey Financial Corp. (the “Issuer”)
Item 1(b).	Address of Issuer’s Principal Executive Offices:
	3501 Jamboree Road, Newport Beach, California 92660
Item 2(a).	Name of Person Filing:
	This statement is being filed by the following persons with respect to the shares of common stock (“Common Stock”) of the Issuer directly owned by Highfields Capital III L.P. (“Highfields III”):
	(i)	Highfields Capital Management LP, a Delaware limited partnership (“Highfields Capital Management”) and investment manager to Highfields III;
	(ii)	Highfields GP LLC, a Delaware limited liability company (“Highfields GP”) and the General Partner of Highfields Capital Management;
	(iii)	Highfields Associates LLC, a Delaware limited liability company (“Highfields Associates”) and the General Partner of Highfields III;
	(iv)	Jonathon S. Jacobson, a Managing Member of Highfields GP and a Senior Managing Member of Highfields Associates;
	(v)	Richard L. Grubman, a Managing Member of Highfields GP and a Senior Managing Member of Highfields Associates;
	(vi)	Highfields III, an exempted limited partnership organized under the laws of the Cayman Islands.
	Highfields Capital Management, Highfields GP, Highfields Associates, Mr. Jacobson, Mr. Grubman and Highfields III are sometimes individually referred to herein as a “Reporting Person” and collectively as the “Reporting Persons.”
Item 2(b).	Address of Principal Business Office or, if None, Residence:
	Address for Highfields Capital Management, Highfields GP, Highfields Associates, Mr. Jacobson and Mr. Grubman: c/o Highfields Capital Management LP John Hancock Tower 200 Clarendon Street, 59th Floor Boston, Massachusetts 02116

CUSIP No. 261018105 13G/A Page 9 of 14 Pages

	Address for Highfields III:
	c/o Goldman Sachs (Cayman) Trust Limited Suite 3307, Gardenia Court 45 Market Street, Camana Bay P.O. Box 896 Grand Cayman KY1-1103 Cayman Islands
Item 2(c).	Citizenship:
	Highfields Capital Management – Delaware
	Highfields GP – Delaware
	Highfields Associates – Delaware
	Jonathon S. Jacobson – United States
	Richard L. Grubman – United States
	Highfields III – Cayman Islands
Item 2(d).	Title of Class of Securities:
	Common Stock, $0.01 par value
Item 2(e).	CUSIP Number:
	261018105
Item 3.	Not applicable.
Item 4.	Ownership.
	For Highfields Capital Management, Highfields GP, Highfields Associates, Mr. Jacobson and Mr. Grubman:
	(a)	Amount beneficially owned: 1,675,074 shares of Common Stock
	(b)	Percent of class: 5.8%
	(c)	Number of shares as to which such person has:
		(i)	Sole power to vote or to direct the vote: 1,675,074
		(ii)	Shared power to vote or to direct the vote: —0—
		(iii)	Sole power to dispose or to direct the disposition of: 1,675,074
		(iv)	Shared power to dispose or to direct the disposition of: —0—
	For Highfields III:
	(a)	Amount beneficially owned: 1,675,074
	(b)	Percent of class: 5.8%
	(c)	Number of shares as to which such person has:
		(i)	Sole power to vote or to direct the vote: 1,675,074
		(ii)	Shared power to vote or to direct the vote: —0—
		(iii)	Sole power to dispose or to direct the disposition of: 1,675,074
		(iv)	Shared power to dispose or to direct the disposition of: —0—

CUSIP No. 261018105 13G/A Page 10 of 14 Pages

Item 5.	Ownership of Five Percent or Less of a Class.
	Not applicable.
Item 6.	Ownership of More than Five Percent on Behalf of Another Person.
	The shares of Common Stock beneficially owned by Highfields Capital Management, Highfields GP, Highfields Associates, Mr. Jacobson and Mr. Grubman are directly owned by Highfields III. Highfields Capital Management serves as the investment manager to Highfields III. Each of Highfields Capital Management, Highfields GP, Highfields Associates, Mr. Jacobson and Mr. Grubman has the power to direct the dividends from or the proceeds of the sale of the shares of Common Stock owned by Highfields III.
Item 7.	Identification and Classification of the Subsidiary Which Acquired the Security Being Reported on by the Parent Holding Company.
	Not applicable.
Item 8.	Identification and Classification of Members of the Group.
	See Exhibit 1 attached hereto. Each Reporting Person disclaims beneficial ownership of the shares of Common Stock beneficially owned by the other Reporting Persons.
Item 9.	Notice of Dissolution of Group.
	Not applicable.
Item 10.	Certification.
	By signing below I certify that, to the best of my knowledge and belief, the securities referred to above were not acquired and are not held for the purpose of or with the effect of changing or influencing the control of the issuer of the securities and were not acquired and are not held in connection with or as a participant in any transaction having that purpose or effect.

CUSIP No. 261018105 13G/A Page 11 of 14 Pages

SIGNATURE

After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.

February 17, 2009

Date

HIGHFIELDS CAPITAL MANAGEMENT LP

By: Highfields GP LLC, its General Partner

/s/ Joseph F. Mazzella

Signature

Joseph F. Mazzella, Authorized Signatory

Name/Title

HIGHFIELDS GP LLC

/s/ Joseph F. Mazzella

Signature

Joseph F. Mazzella, Authorized Signatory

Name/Title

HIGHFIELDS ASSOCIATES LLC

/s/ Joseph F. Mazzella

Signature

Joseph F. Mazzella, Authorized Signatory

Name/Title

JONATHON S. JACOBSON

/s/ Joseph F. Mazzella

Signature

Joseph F. Mazzella, Authorized Signatory

Name/Title

CUSIP No. 261018105 13G/A Page 12 of 14 Pages

RICHARD L. GRUBMAN

/s/ Joseph F. Mazzella

Signature

Joseph F. Mazzella, Authorized Signatory

Name/Title

HIGHFIELDS CAPITAL III L.P.

By: Highfields Associates LLC, its General Partner

/s/ Joseph F. Mazzella

Signature

Joseph F. Mazzella, Authorized Signatory

Name/Title

CUSIP No. 261018105 13G/A Page 13 of 14 Pages

EXHIBIT INDEX

Exhibit 1. List of Members of Group

CUSIP No. 261018105 13G/A Page 14 of 14 Pages

Exhibit 1

Members of Group

Highfields Capital Management LP

Highfields GP LLC

Highfields Associates LLC

Jonathon S. Jacobson

Richard L. Grubman

Highfields Capital III L.P.