At the same time, the securities industry, which had record earnings in 2009, remains in the midst of a painful evolution five years after the start of the financial crisis and still faces headwinds as a result of a tepid economic recovery and lingering regulatory uncertainty, the report finds.

"The securities industry remains in transition, and volatility in profits and employment show that we have not yet reached the new normal," New York State Comptroller Thomas DiNapoli said in a statement accompanying the report.

Wall Street banks suffered record losses as the subprime mortgage crisis threatened to topple the entire financial system in 2007 and 2008. The banks then rebounded to record profits of more than $61 billion in 2009 and another strong year in 2010. But the fallout from the crisis has prompted them to change their business mix and shift away from the once profitable, if risky, practice of trading their own money. The more traditional investment banking business of advising on mergers and acquisitions has also been under pressure as dealmaking activity has slumped in a soft economy.

In the face of those challenges, the broker/dealer operations of the New York Stock Exchange member firms generated $10.5 billion in profits in the first half of this year – the fifth-best start on record – even as revenues for the industry continued to dwindle and revenue for the five biggest banks dropped to their worst levels since 2008.

But last year also started strong, with the securities industry earning $12.6 billion before the European sovereign debt crisis and the protracted negotiations in Washington over raising the U.S. debt ceiling undercut the global economy and resulted in a much worse second half. The industry posted $4.9 billion in losses for the last six months of 2011, ending the year with what the DiNapoli report terms a disappointing $7.7 billion in profits.

Similar headwinds could still derail 2012 profitability as well. "The impending fiscal cliff and further deterioration in domestic and global economic conditions could quickly erode profitability in the securities industry in the second half of this year," the New York State comptroller's office said in releasing its report.

Regulatory uncertainty continues to take a toll, too, as banks prepare for new rules as well as higher capital and margin requirements. The exact parameters of the widespread reforms ushered in by the Dodd-Frank Act of 2010 remain unclear. As of Oct. 1, only a third of the nearly 400 rules required by the law have been completed, according to a progress report produced by the law firm Davis Polk and cited in the DiNapoli analysis. Another 135 rules have been proposed but not finalized, and 136 rules have yet to be proposed.

Among those rules yet to be finalized is the so-called Volcker Rule, which seeks to limit proprietary trading by large financial institutions. A first draft of the rule was released last fall, but the final language has been the subject of a highly partisan lobbying battle, including attacks on its workability and questions about possible exemptions and the rule’s overall effects. A final version is expected by the end of the year, but banks have already cut back sharply on proprietary trading in anticipation of the new regulatory landscape. Revenue from trading on their own accounts fell by 15 percent in the first half of 2012 compared to the same period in 2011, the DiNapoli report says.

The banks are also still dealing with the legal fallout from the financial crisis. New York Attorney General Eric Schneiderman last week filed a civil fraud suit against JPMorgan Chase related to subprime mortgage-backed securities sold by Bear Stearns, which JPMorgan bought at the start of the crisis in 2008. And Bank of America last month agreed to pay $2.43 billion to settle a shareholder lawsuit related to its 2008 purchase of Merrill Lynch.

Yuval Rosenberg is the Business+Economy editor at The Fiscal Times. Subscribe to The Fiscal Times' free newsletter.

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