 Bill Clinton changed the Democratic Party, and Elizabeth Warren is trying to change it back — at least when it comes to Wall Street. The latest intra-party skirmish has come over the so-called "CRomnibus" (don't ask) spending bill that would have funded the government for the next year, as well as, among other pet projects, killed Dodd-Frank's prohibition on big banks using federally-insured money to make exotic bets. Now, that wouldn't gut financial reform by any means, but it would be the latest step in Wall Street's death-by-a-thousand-tweaks campaign against it. And that was too much for Warren, who led a liberal revolt against the bill that ultimately failed. But what would this derivatives change even do? Well, swaps are just bets on everything from interest rates to currencies to whether a company is going to go under or not. The way they work is one side promises to pay a fixed amount of money every, say, six months, and the other agrees to pay an amount tied to whatever they're betting on. So, for example, if you wanted to hedge your risk against interest rates rising, you might decide to pay a bank $3 million every half-year, and in return they would pay you $100 million multiplied by an agreed-upon interest rate (usually Libor). This might sound complicated, but the idea is simple: you're locking in borrowing costs of 3 percent—that's your $3 million divided by the same $100 million—and the other side is betting that rates won't be that... |
