The U.S. banking system is still in dire straits as the number of problem banks keeps rising, giving few breaks to financial exchange traded funds (ETFs).

The expectation is that more banks are likely to fail as the number of troubled banks and thrifts rose in the third quarter from 117 to 171, report John Poirier and Karey Wutkowski for Reuters.

FDIC reserves to back deposits was $24.6 billion as of September, up 23.5% from the previous year. FDIC classified banks with a problem was up 46%, the highest since 13 years prior, due to the beat up banking system. FDIV regulator disclosed there are 171 problem banks as of September 30, with 117 for the second quarter, marking a large shift, reports Alison Vekshin for Bloomberg. Banks are measured upon asset quality, earnings and liquidity.

AIG (AIG) has announced that they are limiting how much they pay their top executives, thus far granting a $1 salary for this year and the same for the fiscal year 2009 to Chief Executive Edward Libby. So far, AIG has received the most Federal bailout funds at $150 billion, causing the pressure to mount as the public scrutiny rises, reports Leva M. Augustums for Associated Press. This is one of the broader moves made by AIG.

The news could cheer investors and the general public, both of whom had expressed outrage that the bailout money would go to salaries and bonuses. AIG joins other institutions that have taken similar steps, including Goldman Sachs, UBS and Barclays.

  • iShares Dow Jones US Financial Services (IYG): down 56.4% year-to-date; down 17.7% in the last month

Financial ETFs

  • SPDR KBW Regional Banking (KRE): down 22.5% year-to-date; up 1.6% in the last month

Financial ETF

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.