The Wall Street bailout worked. In fact, it worked so well that big banks saw their profits for 2009 through 2010 soar to record levels, according to a new Bloomberg analysis. Nobody should be surprised by this result, but unfortunately for Wall Street the good times might not continue in 2011 and beyond.

Michael J. Moore from Bloomberg sums up a part of the reason why the big banks have done so well:

The surge has come after the five banks took a combined $135 billion from the Treasury Department's Troubled Asset Relief Program and borrowed billions more from the Federal Reserve's emergency-lending facilities in late 2008 and early 2009 following the collapse of Lehman Brothers Holdings Inc. Since then, the firms have benefited from low interest rates and the Fed's purchases of fixed-income securities.

Cheap funding means that investments that pay off can be more profitable to banks. But this is only part of the story. Wall Street also did so well in part because fear and uncertainty resulted in deep assets value declines as the financial crisis and recession peaked. In 2009, values began to rise when it appeared that the worst was over. As a result, trading revenue and gains on asset prices mounted.

The values of stocks, bonds, and real estate might have a little further to rise in the near-term, but it looks like their drastic recovery is finished. That has resulted in muted profits for Wall Street in the latter part of 2010. Combine that with the new regulatory barriers they face due to the Dodd-Frank bill passed this summer, and you get a climate that will make it very difficult to achieve the kind of record revenues that banks enjoyed over the past two years.

Of course, that will likely translate into Wall street bonuses that aren't quite so astronomical. As bank profits fall, so must bonuses. That's argued in a recent Reuters article by Dan Wilchins. One source says:

"Compensation is set at the highest level of the company, and it's based on two things: what you did this year, and what the prospects are for your business in the future," said a former treasurer for a major bank.

If those prospects are poor, he said, "there's not a compelling reason to incent you with pay."

Such a change would be embraced by most Americans, according to a new Bloomberg poll. An incredible 70% of Americans think big bonuses should be banned this year for bailed out firms. That isn't likely to happen, but these angry Americans might be happy to hear that higher capital requirements and other new rules Wall Street firms must follow might help to bring about this result without relying on specific legislation to curb bonus amounts.

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