Section 716 of Dodd-Frank prohibited federal government bailouts of financial entities involved in the business of credit default “swaps.” These were the complex instruments that in 2002 investor Warren Buffett had presaged as being “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal” (Berkshire Hathaway Inc., 2002, 15). Swaps involving complex arrangements were often the main problem in the crises engulfing so many financial entities during this time period. AIG, for instance, guaranteed the coverage of losses for many banks or funds that had invested in mortgage-backed securities, often of the subprime variant.

As Kaiser notes about the negotiations over Section 716, “regulating derivatives in some fashion was part of the broad consensus on the need for regulatory reform” (Kaiser, 2013, 169). But certain financial institutions challenged the “broad consensus” on regulatory reform and sought to weaken Section 716 in particular, so that they could take higher risks with federal funds covering those risks.

The debates over Section 716 were especially divisive, often pitting representatives from the same party against one another. The stakes had everything to do with all of those bailouts of the large firms, because the problem was how to cordon off risk in banks to ensure that there was no federal backstop for this highly risky market segment. Many considered one early position, pushed by Senator Blanche Lincoln, the new chairman of the Senate Agriculture Committee, to be too soft on derivatives.