The only reason it works on HN is because the whole site is ugly, which is fine (content before looks) but few other sites can get away with it.
The HN favicon is not beautiful at all. It's not "good-looking". But when I look at 20 tabs open, you can instantly tell at a glance which ones are Hacker News -- or in a list of bookmarks. That's good design. It's working.
A bad favicon, on the other hand, is reddit's [1], for example. It tries to cram the whole reddit "head" into a 16x16 space, with a small white head against a light blue background (too little contrast, especially against a light-gray tab), with thin black lines. Glancing at it in a list of tabs or bookmarks, it doesn't stand out at all (due to bad "background-y" color choices), and isn't easily recognizable at all (too much detail, no obvious clear central element).
Try opening http://blogsofnote.blogspot.com/ , http://www.homedepot.com/ , and http://8days.nl/ at the same time. See the problem?
There were zillions of redesigns proposals. None of them satisfied me at all. They were clunky, dense and too gloomy on most cases, but hell, even with that proposals I think this site needs love. Lots of love.