

(AP Photo/J. Scott Applewhite)

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 high. That's because you'll be sending them more money than they're sending you if interest rates stay lower than that.

The problem, though, is that theses swaps can get real complicated real fast. Take credit default swaps, which are bets about whether a company or country will go bankrupt. These derivatives were so opaque that banks didn't even know what bets they were making, let alone others. And that's part of the reason that credit markets froze after Lehman failed: nobody knew who was left holding the bag (or holding the bag of the bank that was holding the bag).

Dodd-Frank tried to fix this, at least a little, by forbidding banks from using their federally-insured funds to make these kind of specialized swaps. Instead, Wall Street would have to "push out" these derivatives into subsidiaries that they'd have to put money into themselves to cover any losses—and, in theory, get taxpayers off the hook. But the government funding bill would get rid of this. As Mother Jones points out, Congress added language at the last minute that was taken almost verbatim from Citigroup lobbyists, and will let big banks make these kind of risky bets with government-insured money again.

This actually isn't that big a deal, but the principle is. Think about it this way. If insured banks can't make these bets, then uninsured ones will—and we'd still have to bail them out if they threaten to bring down the whole financial system. But as long as we're talking about run-of-the-mill, and not end-of-the-world, losses, then we, as taxpayers, should clearly prefer for these swaps to happen in the uninsured banks. That way, we don't have to foot the, admittedly small, bill. And this isn't really a debate. There's no real counterargument that I'm aware of why it'd be better for the mega-banks to be allowed to take more risks with taxpayer-insured money (other than it'd be good for their bonuses).

The bigger issue is whether every legislative choke point will turn into another opportunity to whittle away at financial reform. That's why Warren and her allies have decided to draw a line in the sand here, over swaps push-outs. If they don't fight this battle, then they'll have to get ready for the next one over even more important parts of Dodd-Frank—and so on, and so on.

But this isn't a fight that all Democrats want. Some of them are happy to give Wall Street what it wants. That's been true ever since Clinton turned them into not the party of business, but a party of business—and particularly Wall Street business. The Warren wing of the Democratic Party, of course, wants to change this. That's why they oppose filling even lower-level Treasury positions with Wall Street veterans, and why they've rallied against a giveaway to big banks tucked away in the government funding bill.

If Hillary Clinton has any weaknesses, as Noam Scheiber argues, it's her close ties to Wall Street. The question very well could be whether the Democratic Party's soul belongs more to her and her husband or to Elizabeth Warren.