In a last-minute change to the financial reforms bill, Congress allowed Wall Street to continue to sell interest-rate swaps directly, rather than isolating these derivatives in separate units. The thinking behind this move is that the interest-rate securities are benign, or at least less dangerous than credit default swaps, which the legislation requires banks to detach from their main operations.

Questions:

1. What is an interest-rate swap?  Do you think that Congress’ action regarding interest-rate swaps was a good idea?  Why or why not?

2. What is an auction-rate security?

3.  How was the hospital industry harmed by these financial instruments?  What other entities took a hit from these financial instruments?

Source:

Sherter, A. (2010). Financial Reform: How Supposedly Safe Derivatives Make Hospitals Sick, BNET, July 8. (Retrievable online at http://industry.bnet.com/financial-services/100010474/financial-reform-how-supposedly-safe-derivatives-make-hospitals-sick/)