The pen is mightier than the sword.

When he wrote that, Edward Lytton was on to something. Want an example? With the stroke of a pen (or rather, the many strokes of many pens), Doral Financial (NYSE:DRL) caused about $921 million -- in cumulative, pre-tax income -- and $688 million in shareholder's equity, to vanish.

This has been a long-developing story, but it appears as though we're now closer to the end -- although it took longer and has cost more than originally calculated.

As part of the restatement of earnings, Doral cut its 2004 and 2003 earnings by more than half. Looking at 2004, the company produced a 1.5% return on assets and 30.2% return on equity. While those numbers look good, they're helped by a significant tax benefit in that year -- stripping out that benefit reduces the numbers to a more pedestrian 0.72% and 11.7%.

As you might think, 2004 numbers aren't especially helpful here in early 2006. Unfortunately, management has yet to fully piece together the 2005 numbers. That said, they gave us a little flavor of what's been going on -- internal loan originations were up more than 4%, the servicing portfolio grew nearly 10%, and there was some growth in fee income (like insurance), but earnings would be "substantially lower" than in 2004.

I don't have a good enough sense of current management yet to know whether "substantially" means 20%, 50%, or 80%. Consequently, it's very tough to peg even a rough estimate of earnings or year-end book value -- two of the key drivers of most bank stock valuation models.

What I can say, though, is management is saying the right things about changing operations at the bank. They're going to focus more on retaining loans (as opposed to banks like Flagstar (NYSE:FBC), or non-banks like Countrywide (NYSE:CFC), that focus on originating them and selling them off), building the fee income side of the business, and diversifying the loan and overall business approach. In other words, act more like a real, honest-to-goodness bank.

I also can't help but smile when I notice the instances where management tags past indiscretions and mistakes on prior management. I know there are still ongoing investigations around this company, but I would hope the authorities act with a measure of intelligence -- punish the actual wrongdoers (prior management) and not current shareholders.

A lot of bad things have now been undone. Without current numbers, though, it's just too hard to say whether Doral is undervalued. Given that there are so many other strong banking ideas out there (including Income Investor recommendation Bank of America (NYSE:BAC)), I'd suggest either waiting for more information here or perhaps just taking a small stake in the hopes that Doral is back on the road to prosperity instead of perdition.

For more Foolish thoughts on this mess:

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).