While Sen. Chris Dodd’s financial reform bill is one giant 1,300 page tome, it’s so vague that almost any financial product known to man will come under its purview.
That’ll create the “largest and most powerful crony system in history,” Cliff Asness, comic book collector, and his AQR colleague Aaron Brown write in their latest Op-Ed in the WSJ. (FD: Asness gave $4,600 to Dodd's campaign in 2007, but only $409 last year.)
The definition of “swap,” for example, could entail anything from a Maxine Waters back rub to a Goldman CDO. There’s also no clearly defined parameters of what a “major swap participant.” You could buy one tiny swap contract and immediately be labeled an enemy combatant, and you don’t want to find out what that means.
In the bill, a "swap" is defined as "any contract or transaction that has financial, economic or commercial consequence involving purchase, sale, payment or delivery with any contingent clause." We challenge lawmakers to think of any contract or transaction that doesn't meet that definition—from buying detergent with a money-back guarantee to getting a rain-check at the car wash. If you maintain a "substantial" net position in swaps, or if your failure to perform under your swaps could cause "significant" losses, you are considered a "major swap participant." And you really don't want to be one considering how you'll be regulated.