Is Wall Street pay really bouncing back?

More likely, banks are taking advantage of new accounting rules that allow them to place a higher paper value on the mortgages than the price they actually paid for them. These "mark-to-market" changes took effect just in time for the second quarter. Bank profits have improved for months because of the new accounting rules that allowed banks to mark up the value of the troubled assets already on their books. What is new is that banks are buying more MBS to add to that tally. Banks could buy the MBS at low prices in the market, which would boost the banks' own trading fees, since banks get paid whenever they trade for their own accounts. Banks could also record as "profit" the difference between the price they paid and the price that the securities are thought to be really worth. They make money because they're buying more MBS, recording more profit on both the old and new ones, and paying themselves fees.

There are several other reasons to keep the champagne corked before celebrating the apparent newfound health of banks. Wall Street bonus estimates—especially early in the year—are often useless. Things change. Michael Hecht told The Big Money that Wall Street is doing well now, but for the rest of the year, "It won't be the crazy outsize business we've seen over the past few months. We're concerned about how sustainable this is. Things are OK but not on fire." Hecht believes that Wall Street has benefitted from temporary boosts that won't be significant by the end of this year: the fall of Lehman and Bear, the fact that Citigroup and Morgan Stanley have reduced their leverage and become smaller, and the large "spreads" between bond prices and Treasury bond prices, which fuel trading profits but are destined to shrink by December.

In fact, according to Hecht's data, it's hard to see where Wall Street could pull in more profits besides trading. The business of advising on mergers and acquisitions is hibernating for now: Completed acquisitions were down 56 percent this year compared with the same time in 2008. No record bonuses there. Underwriting activity—helping companies sell stocks and bonds—rose only 9 percent and totaled $5 billion in fees for the second-quarter months of April, May, and June. Equity underwriting—helping companies sell stock—was down in June, a letdown after a boom in May when several banks including Morgan Stanley, U.S. Bancorp, Fifth Third, and others all raised money to meet stress-test requirements and ensure an escape from the government's onerous Troubled Asset Relief Program.

Initial public offerings, for instance, are down 68 percent compared with 2008, which itself was a dismal year. Underwriting of bonds also fell—companies that carry investment-grade debt issued 22 percent less than last year, and companies rated for junk bonds raised 40 percent less than last year. In commodities, oil is down 48 percent compared with the same time last year. Those are hardly impressive numbers. It will be tough to prove the banks' strategy; they kept mum about record profits in the first quarter and are likely to do so again.

And, at the same time, there are many who would argue that taking advantage of accounting-rule changes is not making money and that the "profits" are fake. If that's true, take some comfort. Even this year's alleged record bonuses will probably be paid in illiquid, long-term stock that banks can pull back any time they like. Fake bonuses, then, for fake profits.

Photograph of money flying around by Spike Mafford/Getty Images.