We’ve seen some scary stories around (we’ve taken apart one really bizarre version here), and today’s figures from Wells Fargo seem to underscore that we no longer have to fear the worst. Indeed, but on the other hand, recovery in the financial sector still has some to go..

It’s springtime for banks and financial stocks.

The sector at the epicenter of the credit crisis has moved sharply higher off the March lows and was in rally mode again on Thursday thanks to:

• Wells Fargo, which forecast first-quarter profits of $3 billion, far beyond analysts’ expectations.
• Continued strength in life insurance stocks amid reports the government will open TARP to the industry.
• A New York Times story, citing officials involved in the government’s stress test, which declares “all 19 banks undergoing the exams will pass them. “

The first two points are somewhat self-evident. The last one, however, is a continuation of what many believe is a hoax (or outright crime) being perpetrated on the American people by its government.

By presumably leaking this “news”, the government wants to reassure Americans “the banking system, broadly speaking, seems to be in better shape than many people think,” as The NY Times reports.

That could be very significant if the problem really is one of a lack of confidence, as Treasury Secretary Tim Geithner (and his predecessor) seems to believe. But as we discuss in the accompanying video with Jon Najarian of OptionMonster.com, such confidence-boosting measures are counting on the majority of Americans to take the government’s word for it and not consider the following:

• The stress tests are being conducted with little transparency – and by the banks themselves.
• The “baseline” stress-test scenario is for unemployment of 8.4%, which is below the  actual March reading of 8.5%, which itself understates the pain.
• The “adverse” scenario is for unemployment of 10.3%, which many mainstream economists believe is very likely given current trends – even if the economy already has bottomed since hiring lags a recovery.
• The government has said banks that do fail the stress test will be given additional capital, i.e. we’re keeping zombie banks alive – just like Japan! – even as bad loans in commercial real estate and other categories are starting to mount.
• “Many of the largest American lenders…probably need to be bailed out again,” The Times reports in its otherwise upbeat story.
• Morgan Stanley is facing larger-than-expected losses on some leveraged loans, The WSJ reports.
• Berkshire Hathaway just got downgraded from Aaa by Moody’s.
• GE Capital is sitting on a bad-debt time bomb, according to Steve Eisman of FrontPoint Partners.

Despite these uncomfortable facts – and related concerns about Geithner’s Public-Private Investment Program for toxic assets – hope springs eternal the bottom for financial shares really is in.