Category Archives: Loan Swaps

The recent changes to the banking regulations, slipped in by lawmakers in a spending bill is a giveaway to banks. Taxpayers will be left to pay for future bailouts according to critics. Bankers and lobbyists say the banking system will be more risky by this new legislation.

But for Wall Street, the change is a no brainer fix to an extreme regulation based on an overreaction from the 2008 meltdown of the global financial system. The big controversy is on arcane financial instruments recognized as loan swaps, which are contracts between banks used to spread the risk in their loans and trades.

Senator Elizabeth Warren says, “This provision is all about goosing the profits of the big banks. The change in the law will simply confirm the view of the American people that the system is rigged.”

The problem with these swaps, is that they were created as a form of insurance that the bonds would pay as promised, but when people can’t afford their mortgage payments anymore, these bonds blow up. The banks and firms that hold the suddenly-toxic swap contracts will need taxpayer bailouts.

Banks claim they use swaps to limit risks, not to make them more risky. They maintain that without swaps, the Main Street customers will be hurt, not Wall Street.

James Ballentine, head of congressional relations for the American Bankers Associations, says “Hedging and mitigating risk are not only good business practices, but are important tools that banks use to help borrowing customers hedge their own business risks.”