What Bank of America and Citi's Profits Mean for Wall St

Citigroup shocked Wall Street today by announcing a $4.3 billion profit in the second quarter, the same day that the beleaguered giant Bank of America also beat expectations with a $3.2 billion quarter. This caps a banner week for banks, with Goldman Sachs and JP MorganChase also announcing walloping second-quarter profits. Is this bad news for America, or good news for Obama's bank strategy? Or is it somehow both?

First let's look at the bad-news-for-America argument. Paul Krugman writing in the New York Times, joins the chorus of Goldman Sachs haters and comes right out saying that Goldman "is bad for America." He goes on:

What's clear is that Wall Street in general, Goldman very much included, benefited hugely from the government's provision of a financial backstop -- an assurance that it will rescue major financial players whenever things go wrong. You can argue that such rescues are necessary if we're to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system's liabilities are now backed by an implicit government guarantee.

It's that last part that deserves parsing. Through TARP funds, historic asset-flooding by the Federal Reserve, hundred-billion dollar bailouts, and a general you-will-not-fail attitude beaming down the I-95 corrider, we really do seem to be climbing out of the financial disaster that was Q4, 2008. Matthew Yglesias convincingly argues that this attitude is a double-edged sword. On the one hand, by showing unwavering deference to the biggest banks, we encouraged massive recapitalization of the banks. On the other hand, that deference has created a situation on Wall Street that Ezra Klein has aptly compared to a risky gambler who knows he can't fail on account of his sketchy relationship with the casino owner.

"By rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis," Krugman writes. I think that's right. Financial reform is going to be an enormous challenge, not just because of the details, but because it will come after much political capital is risked and exhausted over health care and climate change. It will be doubly challenging since, as we've seen today, Obama has helped to rescue the financial system essentially by letting Wall Street be Wall Street.