At the same time the government is preparing for billion-dollar deficits in Federal Deposit Insurance Corp. and depositors from Maryland to Maine are watching their financial institutions hover just above insolvency, the stock market has decided the outlook for banks is blooming.
Share prices are up dramatically, including even the ones with the most tattered balance sheets, such as Baltimore-based MNC Financial Corp., Bank of Boston and the large New York money centers. The rise began months before last week's announcement of a broad, federally sponsored restructuring and has emerged seemingly out of the depths of despair.
"Three to six months ago everyone thought the banks were going to zero," said David Ellison, an analyst with Fidelity Investments. "Guess what? They didn't. There has been a huge reversal."
The recent enthusiasm for banks has been the most notable aspect of a broad surge in the stock market that has also encompassed newspaper companies and homebuilders -- areas that are often considered leading indicators of economic shifts. Strikingly, the sudden change in sentiment has come without impetus from the underlying business conditions of the companies involved.
A new survey by Dun & Bradstreet, for instance, concludes that the best news for construction and manufacturing - the guts of the economy - may be only that the poor conditions aren't getting any worse. Newspaper advertising remains anemic, and bank profits are neither good nor - apparently --- getting better.
A survey of 35 of the largest and most dynamic banks by Salomon Brothers concludes that operating earnings declined 28 percent during 1990, with performance steadily getting worse as the year progressed.
Given the difficult operating environment for many industries and the anchor chained to many companies by the 1980s affinity for debt, any economic enthusiasm is almost as jarring as it is pleasing. Can purgatory be so brief?
Perhaps, even if the evidence at the moment is more theoretical than real. The prevailing sentiment on Wall Street is to buy before the trend becomes broadly apparent.
Many bank stocks, including those of Citicorp, MNC, Continental and Signet, still sell at a small fraction of their peaks despite registering 30 percent to 100 percent gains in the past two months.
But the current sentiment suggests that prospects for those companies are getting better. Why? The most frequently articulated justification is that the government has significant discretion over how well banks do, and at the moment the government badly wants banks to do well because of the industry's pivotal role in the economy. Shearson Lehman Hutton began banging away at that theme as long ago as October, at the same time the major banks were suggesting that conditions were going from ominous to awful.
"When the Fed rings the bell, it's time to buy," Shearson said in a report. The implicit assumption was that the glutted real estate markets, innumerable bad loans and other pressing problems could all be substantially ameliorated by government actions, most notably reductions in interest rates that could be controlled by the Federal Reserve.
"Is a significant interest rate ease a cure-all to the worst real estate environment that we have seen in recent memory?" Shearson asked rhetorically. "No. But it sure helps."
And that, essentially, is what has happened. The Fed has been aggressive in the area where its presence is most evident - short-term rates, which have plunged to 6 percent from 8 percent.
Lower interest rates have many benefits for banks. Their large portfolio of securities appreciates, while the spread between their cost of funds and the rates they receive on fixed-rate loans widens. Loans renegotiated to reflect the lower rates give borrowers more breathing room, and thus their likelihood of going bust declines, enhancing credit quality.
Banks haven't been slow to grab benefits. A benchmark of what banks must pay for money, the federal funds rate, has plunged to 6 percent from 8.25 percent since November. But the prime rate - what banks charge their most creditworthy customers - has only recently fallen to 9 percent from 10 percent.
Lower rates, of course, bring problems too. They reduce the benefits provided to the banks by non-interest-bearing funds, such as the money kept in conventional checking accounts, and also can squeeze the spread banks receive from paying a static rate of about 5 percent on traditional savings accounts and relending at a fluctuating higher rate.
Moreover, the cause of lower rates - a troubled economy - certainly isn't good for banks. But analysts suggest that the shift has been more beneficial than harmful.
And interest rates haven't been the only area of government action. It is rumored that federal examiners have become more tolerant about the values banks ascribe to dicey loans.
Some confirmation is evident in regulatory proposals for more intricate classification of loans, separating those that are bad from those that are really bad. More to the point has been the willingness of government officials, including President Bush, to accuse regulators (who, after all, work for him) of going too far. They are rumored to have become more pliant.
Lower rates and possibly malleable regulators may seem to be fragile supports, but for investors, they're grounds for a striking expansion of confidence. "The discount for uncertainty that was applied to bank stock is disappearing." said Henry Dickson, a Kemper Securities