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Bill Black: Wall Street and ‘Major Parts of the Obama Administration Hate Glass-Steagall’

Nov. 18, 2015 (EIRNS)—Prof. William K. Black, a professor of Economics and Law at the University of Missouri (Kansas City), and former bank regulaor, was interviewed on the Real News Network on Nov. 16. Black was asked to comment on Sen. Elizabeth Warren’s exposure of and attack on the Dodd-Frank Act’s so-called "Swaps Pushout Rule" at the end of 2014. This repeal allowed the five biggest U.S. bank, which are to keep $10 trillion in swaps trades on their books — insured by the FDIC, which taxpayers could be forced to bail out in the next crash.

Prof. Black explained Wall Street’s successful push to keep their swaps under FDIC protection like this: "To put this in context, this is one of the byproducts of the repeal of Glass-Steagall. So, Glass-Steagall was the law passed in the Great Depression after another investigation about what helped cause the Great Depression. And it said we shouldn’t be providing deposit insurance, a Federal subsidy, to banks when they’re out owning things and competing with other businesses. That doesn’t make any sense. It would distort competition; give them an advantage, and it would put us at enormous risk, and it would create lots of conflicts-of-interest. And Glass-Steagall worked brilliantly for decades, but then in— near, the end of the President Clinton’s term in office, he eagerly worked with the Republicans to get rid of Glass-Steagall.

"Then came, of course, the current financial crisis. And you would have thought that we would have reinstated Glass-Steagall. But President Obama and the Republicans agreed that they would not bring Glass-Steagall back. So Paul Volcker, former chairman of the Federal Reserve, and someone President Obama had touted in his first campaign, that Paul Volcker—by then the most prestigious finance expert in the world—was serving as an economic advisor to the president. So Paul Volcker said, well, if you aren’t willing to bring back Glass-Steagall, you should at least prevent what’s called proprietary trading in derivatives. And that means trading for the bank’s own purposes. And so we got the Volcker Rule and restrictions on swaps (a form of financial derivative.)"

Black explained that the most common swap is an interest rate swap, in which one party, usually a bank, swaps with another party, usually a bank. "One gets a fixed rate of interest, and the other gets a variable rate, usually based off of the LIBOR, and other fraud we’ve talked about. So when they [gimmicked] the LIBOR rates, the $10 trillion figure that we talked about is a subset of the $350 trillion in derivatives that they were manipulating...

"Now, it’s really bad; the best Volcker could do, but it’s not very good. Because once you don’t have Glass-Steagall, and the rule is, whether it’s the bank is trading for its own account or whether it’s hedging—well, you can call almost anything a hedge, and obey the Volcker rule, and frankly, obey much of the swap rule as well. So, there’s a bit of a question whether even without the repeal that you talked about, whether the law would have been effective. But of course—they, being Wall Street, wanted to make absolutely sure it was ineffective. So they got this repeal... [which] was a very high priority, and they literally drafted the great bulk of the legislation that did this.

"And this was done somewhat over the resistance of the Obama administration, because the Republicans were holding the budget hostage. But in truth, major parts of the Obama administration— which is to say Treasury and the chiefs of staff—have typically opposed the Volcker rule. [They] Hate Glass-Steagall..."