The Federal Reserve meeting, scheduled to take place today at 2:15 Eastern, has gone from run-of-the-mill, to eagerly anticipated. Many are wondering if they’ll reverse course and lower interest rates. The benchmark rate has been steady at 2% in order to fight inflation, but now there’s speculation that rates will be cut to free up cash for banks.

Meanwhile, the Federal Reserve pumped another $70 billion into the nation’s financial system to help ease things, reports Jeannine Aversa for the Associated Press.

Overnight and early this morning, several developments within the financial sector took place that show the markets in various stages of crisis and recovery:

• Goldman Sachs (GS), one of the banks that has looked the best throughout the credit crisis, posted a profit of $845 million for the third quarter, but its year-over-year earnings are down 70%. Even though the results are in the black, which is impressive in this climate, it shows that even the toughest on Wall Street are feeling challenged right now. Revenue fell slightly short of analysts’ expectation, reports Louise Story for the New York Times.

• Barclays is in talks with Lehman Brothers (LEH) about the possible acquisition of some assets. No details have been given. The talks concern its broker-dealer business, which is separate from its mortgage assets, says Landon Thomas Jr. for the New York Times.

• The government is reportedly considering extending aid to American International Group Inc. (AIG). Several ratings agency downgraded the world’s largest insurer, which can add to the amount of money the company has to set aside, Tim Paradis for the Associated Press reports. Investors are afraid that if there’s a failure, it would touch off a wave of financial turmoil.

Affected ETFs:

• Financial Select Sector SPDR (XLF), down 25.6% year-to-date
• Regional Bank HOLDRs (RKH), down 15% year-to-date
• iShares Dow Jones Broker-Dealers (IAI), down 40.4% year-to-date
• First Trust Financials AlphaDEX (FXO), down 20.1% year-to-date
• iShares Dow Jones US Financial Sector (IYF), down 22.1% year-to-date

Investors seem increasingly convinced that if the government bails them out, their shares will plunge to zero, reports Alan Zibel for the Associated Press. Fannie Mae’s CEO reassured investors that a bailout isn’t imminent, but shares are still way down midday to their lowest point in nearly 20 years.

A government bailout package was unveiled on July 13 that included a plan to provide unlimited government loads to the mortgage giants. Critics say the bailout is too open-ended and could expose taxpayers to billions in potential losses.

Financial ETFs are breaking even so far in trading today:

• iShares Dow Jones U.S. Financial (IYR), down 3.9% year-to-date
• KBW Bank (KBE), down 28.3% year-to-date
• First Trust Financials AlphaDEX Fund (FXO), down 21.9% year-to-date

But coming off news of July’s rebound is a round of news this morning that seems to have things picking up for the sector once again. We reiterate, though, what while things do seem to be picking up, investors would be wise to wait until this sector once again travels above its trend line before jumping back in.

• UBS (UBS) reached a $19.4 billion agreement to buy back bonds, reports the Associated Press. It’s the biggest settlement yet after claims that banks misled investors to buy auction-rate securities. Yesterday, Citigroup (C) agreed to buy back $7 billion of such securities, while last week, Merrill Lynch (MER) said it would buy back $12 billion of them.

• Fannie Mae (FNM) posted a second-quarter loss that was three times what Wall Street had expected. The $2.3 billion loss is blamed on rising defaults and foreclosures, and it has forced the mortgage giant to make cutbacks, reports Alan Zibel for the Associated Press. The good news is that Fannie Mae predicts the worst of it will be over by the end of this year. But it still cautions investors that losses could still remain through the current quarter as it tries to unload foreclosed homes and restructure loans.

• MBIA (MBI) notched a $1.7 billion profit in the second quarter, wildly beating analyst estimates. But the world’s largest bond insurer is having trouble getting new business since losing its top debt ratings, reports Christopher Kaufman for Reuters.

ETFs that are feeling the better vibes this morning include:

• Rydex S&P Equal Weight Financials (RYF), down 24.5% year-to-date
• Financial Select Sector SPDR (XLF), down 25.4% year-to-date
• First Trust Financials AlphaDEX (FXO), down 19.8% year-to-date
• iShares Dow Jones US Financial Sector (IYF), down 23.1% year-to-date

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.