AUDIE CORNISH, HOST:
It's been a decade since the financial crisis that devastated the global economy. In the years that followed the collapse, Congress and federal regulators drew up rules to rein in big banks and prevent another crisis. A report out today says banks have found a loophole around some of those rules, and it warns that taxpayers could be on the hook if the economy takes a bad turn.
NPR's Jim Zarroli has been digging into this. He joins us now. And, Jim, the 2008 crisis was caused by a lot of complicated financial investments. So is this what the report is focused on?
JIM ZARROLI, BYLINE: Yes. Yes. Let's say you own some kind of investment, and you're worried that it might lose value. One way that you can protect yourself is by buying something called a credit default swap. Now, this is one of those really complex Wall Street products that works like - it works like a kind of an insurance contract. You can even buy these contracts on someone else's investment.
And that's exactly what a lot of investors did in the years leading up to the crash. They placed bets on assets owned by other people, especially on mortgages. The market for those products was huge. It was in the trillions of dollars. So when the mortgage market tanked, there were just enormous losses, and they dragged the global economy down. And after that, Congress came in and set up a lot of new rules to govern these swaps. Wall Street didn't like them because Wall Street makes a lot of money off of selling these products.
CORNISH: Now a report says Wall Street has found a loophole in the rules. Can you give us a little bit more background in the study itself in terms of who did it? And what do they consider a loophole?
ZARROLI: Well, this is based on research by Michael Greenberger of the University of Maryland. During the Clinton administration, he was with the agency that regulates these contracts called the Commodity Futures Trading Commission. Greenberger says all of this comes down to a single footnote in the regulations - you know, the kind of footnote that most people don't ever read. It essentially says the regulations don't apply if the products are traded overseas. And Greenberger says the banks interpreted this to mean that they could, you know, slough these trades off to their foreign subsidiaries.
CORNISH: So wait a second. You're talking about swaps overseas. Why would that be a problem for U.S. taxpayers?
ZARROLI: Well, it comes down to a question of who's on the hook. I mean, remember; after the financial crisis, U.S. taxpayers had to bail out the banks for losses. The banks are saying that won't happen again this time because these - you know, these - swaps are traded overseas, so U.S. rules don't apply. But Greenberger says that's a fig leaf because even though a foreign subsidiary will be doing the trades, these are still U.S. banks, so U.S. taxpayers will have to bail them out.
CORNISH: The U.S. economy seems to be doing fairly well right now. How much should we really be concerned about this?
ZARROLI: Well, we don't really know how big a problem this is. Greenberger says a lot of these trades - you know, we just don't know that much about how many there are. But the former Fed Chairman Paul Volcker appeared at a press conference today to talk about this report. And he says history really shows us that these problems have a way of festering, and then all of a sudden, you have, you know, a really big problem on your hands.
(SOUNDBITE OF PRESS CONFERENCE)
PAUL VOLCKER: What strikes me is I've seen it all before...
VOLCKER: ...Over and over again in different degrees of complication.
ZARROLI: So federal regulators are aware of this loophole. They've been working on this before. Under the Obama administration, there was an effort that took some time to try to tighten it. I reached out to the Commodity Futures Trading Commission today to find out what's going on with that, but they declined to comment.
CORNISH: That's NPR's Jim Zarroli. Jim, thank you.
ZARROLI: You're welcome.
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