How do you turn a $12.2bn loss into a 22 per cent gain? When Washington Mutual and Wachovia reported dreadful results on Tuesday, their shares soared. The sector as a whole is up 6 per cent this week.

Any number of reasons are put forward for this most counter-intuitive of rallies: short covering, impending mergers, oil prices dropping. Another is that old favourite: the boil has been lanced. A Bloomberg report that John Paulson, the hedge fund manager who made an estimated $3.7bn for himself last year by betting against the subprime bubble, may establish a fund to invest in the scarred banking sector fuels hope that writedowns are largely complete. If true, even the most demoralised banking executive must see the humour in the arch short-seller now considering helping the sector get back on its feet.