Banks are reporting great earnings. But this is to be expected because making banks profitable is the most politically palatable way for the government to recapitalize the banking system. The government accomplished this by holding interest rates that banks have to pay on their deposits to almost zero and relaxing the accounting rules so they don’t have to be diligent about writing off their bad loans.

It looks to me like the plan is working. If this continues, the banks will make enough money to earn their way out of the bad loans that are still on their books.

Some banks are putting their executives’ interests ahead of their shareholders’, by using the lion’s share of the profits to pay record bonuses. Other banks are using the profits to do things more in line with their shareholders’ interests — paying back TARP, making acquisitions, and rebuilding their capital without diluting shareholders.

Now that profits are rising, I think banks that are using the profits to do right by their shareholders are going to be good investments. Two picks from Marketocracy mFOLIO Master Eugene Groysman, that I have written about in the past are US Bancorp (USB) and Barclays (BCS). Both still look good at current prices. I think these two banks may be among the first to start to restore their dividend.