Banks are back. JPMorgan Chase recently announced that it earned $4.8 billion in the fourth quarter of

2010, nearly 50% over the previous year. Its CEO, Jamie Dimon, said he hoped the bank would soon return to paying meaningful dividends to shareholders, having all but suspended them in 2008.

Meanwhile, in Britain, Barclays chief Bob Diamond received a thrashing in a parliamentary debate over

bonuses after he declared, "There was a period of remorse and apology for banks. I think that period

needs to be over." He'll likely pocket about $13 million this year, thanks in part to the tidy profit Barclays

made from the remnant of Lehman Brothers it purchased for pennies on the dollar.

Goldman Sachs CEO Lloyd Blankfein, left, JPMorgan Chase CEO Jamie Dimon, Morgan Stanley

Chairman John Mack and Bank of America CEO Brian Moynihan participate in a financial-crisis hearing

on Capitol Hill on Jan. 13, 2010

Mark Wilson / Getty

Goldman Sachs employees won't go hungry either. The bank's fourth-quarter earnings may have been

hurt by weak trading results, but it is still hugely profitable. Like many other Wall Street firms, Goldman

responded to public outrage over its billions in profits by adopting a lower profile when it comes to

bonuses, instructing its executives to take more of their pay in deferred stock grants rather than cash and

conducting internal reviews (the result of one such 63-page tome can be abbreviated to "We didn't really

do anything wrong"). Nonetheless, these institutions are still minting money. In one day alone, Wall

Street announced two massive multibillion-dollar deals: Duke Energy's plan to buy Progress Energy for

$13.7 billion and DuPont's $6 billion purchase of Danish company Danisco. And though Citibank

disappointed expectations in its recent results, no need to shed tears: it still managed to earn $1.3 billion

in the last three months of 2010.

There is nothing inherently wrong with large banks making large profits. Yet the news from Wall Street is

attracting the ire of Main Street, which continues to struggle. Witness the hoopla over Goldman Sachs' Facebook private offering, which would have allowed its wealthiest clients to buy shares of the firm

before the general public could. (The bank has since pulled the offering in the U.S.)

What's amazing is that Goldman could have failed to predict the outrage such an offering would provoke.

While everyone else struggles, banks have been in a privileged position, benefiting from interest rates on

short-term interbank loans (the mother's milk of all banking transactions) of nearly zero and long-term

rates above 3% plus fees. Because a functioning banking system is as essential to modern society as

power plants and water, banks have been given every advantage by government.

They have not, however, responded in kind. They have not aggressively lent money. Instead, they have

hoarded capital. They have done so to pay for legal fees and for defaults on mortgages and credit cards.

Though loans have increased in recent months, it's after an unprecedented period of contraction. Credit

remains tight.

The goal is not to return to the obscenely loose credit standards that fueled the housing bubble, but large

banks are now tilting to the other extreme. Part of the problem is that the regulations designed to prevent

a repeat of the crisis of 2008 — including demands for much higher capital reserves, instituted as part of

the Basel accords last summer — have incentivized banks to reduce risk, increase their reserves and

tighten lending standards. Instead of taking the government bailouts and then bolstering a weak

economy by lending to creditworthy individuals and businesses, banks bolstered their own weak balance

sheets.

On the flip side, the regulations do little to remove systemic risk. Last July, to much fanfare, President

Obama signed the Dodd-Frank bill. "Because of this law," declared Obama, "the American people will

never again be asked to foot the bill for Wall Street's mistakes ... If a large financial institution should ever

fail, this reform gives us the ability to wind it down without endangering the broader economy." (See the

best business deals of 2010.)

Fair enough, but not true. The failure of so many small banks means the large banks have become even

bigger and harder to unwind. Three firms alone — Bank of America, JPMorgan Chase and Citibank —

now control as much as 30% of all deposits in the U.S.

The bottom line is that the financial reforms of the past year need to be revisited. One solution would be

to break up large banks into discrete parts, creating a new Wall Street of boutique banks without as many

conflicts of interest. If we aren't prepared to do that (and there's a good chance we aren't, given the likely

cuts in pay and staff that would impede regulators and other public-sector workers), we need to create

incentives and mandates to lend. Period. It would have been easy to make those part of the bailouts of

2008 and 2009; now it will require carrots like allowing banks more latitude in accounting for bad loans.

That will be seen as extending another hand to already flush banks. Unfortunately, it may be a price we

need to pay.