How should America’s banks be tested?


What do tests really test? This may seem a silly philosophical question, but educators and government agencies are keen to figure this out.

My concern here isn’t with education, but banking. Usually the banks do the testing: Are you credit-worthy? What’s your score?

Anyone who ever took out a car loan, house mortgage or business loan knows what obstacles must be overcome.

We should recall that if banks borrow money from federal sources at around 0.25 percent and just charge twice as much, 0.5 percent, their gross profit is 100 percent! Charging 2.5 percent (and paying only 0.25 percent) provides 1,000 percent gross profit margin. Wouldn’t you want to own a bank?

But banks must pass tests, too. According to a government “stress test,” 31 of the largest U.S. banks passed: In case of financial crisis, they have enough cash reserves to manage their leveraged portfolios.

Forbes claims just five banks control more than half of the $15 trillion financial industry; the test of 31 banks ranges close to 80 percent of financial assets. More tests will come, perhaps producing unexpected surprises in the next few weeks.

We have heard since the Great Recession from Republicans and Democrats that without a healthy banking system our economy would collapse, so this should be good news to all Americans, no?

If I said all my students always pass my courses, wouldn’t you suspect grade-inflation low standards, or simply academic incompetence?

Passing is passing, and if all students or banks deserve to pass the test, why quibble? Isn’t the Millennial generation big on giving trophies in athletic contests even to losers for showing up?

Well, if everyone on Wall Street seems delighted with banks, it’s because self-congratulation is part of the game, making sure the banking welfare system (with government subsidies and bailouts) shields bankers from Main Street and pesky regulators.

But the cozy and perhaps too intimate bond that financial institutions enjoy with their regulators — and politicians who enjoy their campaign largesse — isn’t shared by everyone.

Most surprisingly, the naysayers don’t only include the Occupy Wall Street members of yesteryear or the Tea Party when its members objected to the banking bailout. Instead, the Oracle of Omaha, Warren Buffett, has had some nasty comments about the financial industry, despite (or because of) his intimate knowledge of its leaders and their practices.

Reuters reports that in his latest letter to shareholders, Buffett said: “Periodically, financial markets will become divorced from reality — you can count on that … never forget that 2+2 will always equal 4. And when someone tells you how old-fashioned that math is, zip up your wallet, take a vacation and come back in a few years to buy stocks at cheap prices.” Instead of reflecting reality, Wall Street is mired in fantasy.

As The New York Times reported recently, Buffett mockingly calls “the Street’s denizens” “money-shufflers” who “don’t come cheap” and have “expensive tastes.”

Does he really mean it? When your personal fortune is $72 billion and your tastes remain relatively upper-middle-class, you can say whatever you want. Are these just cheap shots? Or is there an argument here? And if there is one, is it economic or moral?

When Buffett laces his letter with a description of Wall Street bankers as those who “are always ready to suspend disbelief when dubious maneuvers are used to manufacture rising per-share earnings, particularly if these acrobatics produce mergers that generate huge fees for investment bankers,” then it’s clear that economics is at the heart of his critique.

Buffett argues that “Investment bankers, being paid as they are for action, constantly urge acquirers to pay 20 percent to 50 percent premiums over market price for publicly held businesses. The bankers tell the buyer that the premium is justified for ‘control value’ and for the wonderful things that are going to happen once the acquirer’s CEO takes charge.” But this isn’t true; they mislead.

So, if you are confused about why new mortgages aren’t spurring the housing market even though mortgage rates are at historical low levels, or if you are puzzled why business loans aren’t as easily obtained as expected, just remember: If a bank borrows at 0.25 percent and invests in U.S. Treasury bonds that yield (Feb. 28) 4.79 percent, why bother with risky lending to the public it’s supposed to serve?

Have the banks passed your financial, not to mention moral test?

Raphael Sassower is professor of philosophy at UCCS. He can be reached at