There’s a few reasons for skepticism…

First, the earnings are largely illusory. Bank of America comes right out and says it - there were a number of one-off profits in the numbers, and the second half of the year should be much more difficult.

Second, the earnings aren’t signs of true recovery. They aren’t based on solid economic recoveries… but rather on yet more speculation, and the fees therein.

In other words, the banks are getting a nice cut of money that’s being moved around… but nothing of value is being produced. And little of value is being sold - these banks still aren’t making loans to most homebuyers or small businesses.

Third, with so much of the competition now bankrupt and out of business, these companies should be doing even better. Think about it - Bear Stearns, Lehman, CIT, countless others are all gone. The banks left standing ought to be doing much better, as more business comes their way.

But the real reason this ‘recovery’ should make us worried? Simply put, the sector that led us into a bear market is never the one that leads us out. As long as financial institutions are leading the way, you should be extremely wary of this latest rally.

Federal officials are discussing the possibility of converting the U.S. government’s preferred shares of Citigroup Inc. (C) to common stock in a move that would boost taxpayers’ stake in the company to 40%, The Wall Street Journal reported.

The government currently owns $45 billion in preferred Citi shares, or a 7.8% stake of the company. By converting those shares into common stock, the government would increase its stake to 40% at the expense of current shareholders, whose stock would be diluted. The move would be at no additional cost to taxpayers.

By converting the preferred shares into common stock, Citi would bolster its “tangible common equity,” or TCE. The TCE is a measure of what shareholders would receive if an institution were liquidated. It is expected to be one of the key components of the new financial stress tests being administered by federal regulators.

Those stress tests are scheduled to begin this week and will determine how much - if any - additional money that large financial institutions receive from the government. This additional step is being taken to address a gap in how the U.S. government - under the original Troubled Assets Relief Program (TARP) - was previously analyzing the health of big banks and other financial institutions, before injecting taxpayer-provided capital. With the stress tests, the Obama administration is aiming to have a better handle on the health of these institutions, and to lessen the odds that additional rounds of rescue money would have to be brought to bear.

Indeed, under this new plan, if the current financial situation deteriorates, the government may resort to take a majority stake in the most troubled lenders. This has raised the specter of bank nationalization, something that has been hotly debated among the country’s leading financial analysts.