1. FASB changes accounting rule to make banks appear more solvent than they really are. ✔
2. Smart investors stay away from banks.
3. Unobservant investors think banks are doing better, and pile into them
4. Trend investors see the trend and pile on top
5. Higher share prices give banks more ability to raise equity capital in secondary offerings
6. Banks recapitalized with equity now truly are more solvent

So... was the "smart investor" really smart? Wouldn't a really smart investor buy the banks even though he knows they are no better off, simply because he now sees a viable path by which they can redeem themselves?

This is an example of what George Soros calls reflexivity. I have not read his book yet, but I'm interested.