Feature

Reading the bank stress tests

What the federal banking audit tells us about our economic health, and that of our financial giants

The results of the Federal Reserve's stress tests on 19 banks were "one of Washington's worst-kept secrets," said the Los Angeles Times in an editorial. So it's no surprise to learn that  10 banks need a combined $75 billion in new capital to withstand a severe downturn. Treasury Secretary Tim Geithner, who has $110 billion left to rescue banks if they can't raise private money, calls the results "reassuring," but we have our doubts.

Whether you find the results “reassuring” should depend on your profession, said Paul Krugman in The New York Times. Bankers will do well no matter what—if their banks recover, they “win big,” and the “mildness” of the Obama team’s bank policy means they can go back to shady business as usual; if not, they get another taxpayer bailout. For those same reasons, the rest of us “should be very, very afraid.”

The ones who should be afraid are the banks who can’t “fill the hole identified by the Treasury,” said The Wall Street Journal in an editorial. In six months, they’ll have to accept public capital, and the onerous strings attached. The best we can say about this “very public undressing” of the banks is that it’s over, and we can now focus on the “urgent task” of returning them to private hands.

“Pity the ‘stress testers,’” said USA Today in an editorial, who have faced all manner of “carping” about their “highly useful, if imperfect,” tests. In truth, this kind of transparency and oversight could have prevented the banking crisis, and these tests should now be a model for protecting against bankers’ “proven tendency” to saddle taxpayers with their excessive risk-taking.

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