“How should America’s banks be tested?” The Colorado Springs Business Journal, March 20-26, 2015, 23.

How Should 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 with banking. Usually the banks do the testing: Are you credit-worthy? What’s your score?

Any one of us who ever took out a car loan, house mortgage, or business loan knows what obstacles we had to overcome to be found “worthy” of a loan, passing a test.

We should recall that if banks borrow money from federal sources at around 0.25% and just charge twice as much, 0.5%, then their gross profit is 100%! Charging 2.5% (and paying only 0.25%) provides 1,000% 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 US banks somehow passed: in case of a financial crisis, they seem to have enough cash reserves to manage their leveraged portfolios.

Given that Forbes claims that just five banks control more than half of the $15 trillion of the financial industry, the test of 31 banks ranges close to 80% of financial assets. More tests will be coming, so there may be some unexpected surprises in the next few weeks.

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

What would you say if I told you that 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 Millennia Generation big on giving trophies in athletic contests even to losers for just showing up?

Well, if everyone on Wall Street seems delighted with banks, it’s because self-congratulation is part of game, making sure that 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 financial institutions enjoy with their regulators—and the 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, it’s the Oracle of Omaha, Warren Buffett, who 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 his shareholders, he 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 only days ago, Buffett mockingly calls the “the Street’s denizens” “money-shufflers” who “don’t come cheap” and who 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 an economic or moral one?

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.

At one point, 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 C.E.O. 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% and invests in US Treasury bonds that yield (February 28, 2015) 4.79%--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 rsassower@gmail.com See previous articles at sassower.blogspot.com

“Warren Buffett and our Regional Building Dept.,” The Colorado Springs Business Journal, March 16 - 22, 2012, 17.

BUFFETT WEIGHS IN ON POLITICS

Warren Buffett is super-rich, one of our American billionaires who is ready to leave the stage. As he’s planning to depart, he has given the Melinda and Bill Gates Foundation the responsibility of disposing of his billions for good causes. Delegating is an art, not a science, and Buffett seems to be masterful at finding expertise where he needs it.

So why weigh in on political issues? Why make headlines about paying a tax rate lower than his secretary? Why go public with what seems to be his private business? Why expose himself in a way that the millionaire Mitt Romney has shunned for months?

Perhaps the master investor has figured out that presidential election are more of a side-show at best, and at worst a way to expose the ugliest of what our country stands for, with mud-slinging and unfounded accusations, appeals to religion rather than the Constitution, and overblown concerns with abortion rather than health care reforms.

Perhaps he’s figured out that presidents come and go, maintaining a status-quo set up by a huge D.C. bureaucracy that runs its own course. Presidents—Republicans and Democrats alike—end up powerless against Congress. There is a reason why Congress’ approval rating is so low that in some polls it’s in single digits: it has become a dysfunctional institution.

So, Buffett sent out a letter offering his “Congressional Reform Act of 2011.” It’s fairly simple, and if implemented could change the course of American politics, bringing it back to the vision of the Founders who believed that representatives should meet for short periods of time annually to legislate. Here’s Buffett’s agenda:

“1. No Tenure/No Pension. A Congressman collects a salary while in office and receives no pay when they are out of office.

2. Congress (past, present & future) participates in Social Security. All funds in the Congressional retirement fund move to the Social Security system immediately. All future funds flow into the Social Security system, and Congress participates with the American people. It may not be used for any other purpose.

3. Congress can purchase their own retirement plan, just as all Americans do.

4. Congress will no longer vote themselves a pay raise. Congressional pay will rise by the lower of CPI or 3%.

5. Congress loses their current health care system and participates in the same health care system as the American people.

6. Congress must equally abide by all laws they impose on the American people.

7. All contracts with past and present Congressmen are void effective 1/1/12. The American people did not make this contract with Congressmen. Congressmen made all these contracts for themselves. Serving in Congress is an honor, not a career. The Founding Fathers envisioned citizen legislators, so ours should serve their term’s, then go home and back to work.”

Straightforward as this seems, no ground-swell support is seen anywhere. We grumble and complain, despise our professional politicians for the special conditions of their employment, health care, and their retirement benefits, but they snub us all, remaining detached from the constituents they are supposed to represent.

Moving from the national level to the local, one wonders why our local millionaires—and there are quite a few of them here—aren’t as outraged as Buffett or as forthcoming with suggestions to reform our local political bastions of power—bureaucracies without supervision. Some do get involved, but not enough.

RBD’s leadership, Sharon Brown, chairwoman of the commissioners and Fountain City Councilwoman, vice chairman Dennis Hisey who is El Paso County Commissioner, and Bernie Herpin who is CS Councilman, has refused to respond to the questions posed in writing on 1/12/12 and published in the CSBJ on 2/17/12.

Obviously RBD is not accountable to anyone. Its organizational chart is still a secret only these commissioners know but refuse to divulge to the public. And here we are, trying to lure businesses to our town, but they won’t be able to refurbish spaces or pull permits because the commissioners won’t let them know who they should approach. Maybe a contractor will whisper the secret to their ears (for a fee), maybe not.

Unlike the RBD, and for that matter MHS and CSU, the Fire Chief decided to put together a task force to find “Business/Broker Solutions for 2012.” Chief Brown and Fire Marshal Lacey are trying to be business-friendly, forward-looking. Two RBD representatives were at the first meeting—nice and conscientious individuals who care about the city but remain politically powerless.

It’s not that RBD employees are not wonderful professionals who want to do the right thing; it’s that their bosses are unresponsive to the public, careless at best and negligent at worst, snubbing the same public these employees are trying to serve.

Raphael Sassower is professor of philosophy at UCCS who is still waiting to hear back from RBD’s three commissioners. He can be reached at rsassower@gmail.com See previous articles at sassower.blogspot.com