The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500

Dear President Obama,

It is my understanding that your Treasury Department is considering additional regulations regarding the trading of derivative securities, including credit default swaps (CDS), which are currently unregulated and trade directly between parties and counter parties, primarily between financial institutions. Specifically, the U.S. Treasury Department is considering the oversight of the trading of standardized contracts onto exchange or electronic trading platforms in an effort to increase transparency by making it easier to monitor prices and trades. Customized contracts would still trade directly, but would be subject to new reporting requirements.

Currently, the International Swaps and Derivatives Association, Inc. (ISDA) has indicated that as of December 31, 2009, the notional value of derivatives worldwide was $531.2 trillion. The approximate value of the world GDP is $70.65 trillion, the U.S. GDP is about $14 trillion and the value of all publically traded global corporations is about $51 trillion. This means that derivatives trading if totally unwound would be valued at 38 times the U.S. GDP and approximately 7.5 times the entire global GDP.

We do not need, nor does the global economy require, derivative trading. It increasingly is leveraging and speculating with our entire global economy, which could have a catastrophic economic impact. The only reason CDSs exist is to make traders, trading corporations, including Goldman Sachs, and exchanges, comprised of traders, lots and lots of money. Derivatives create little or no employment, no new businesses and no new community wealth. It only makes money out of money and creates a totally false economy. 

Some argue that derivatives are ways to measure and reduce risk, and that almost all large corporations use them to reduce the risk in interest rates, currency, supplies or the chances of a credit default by one of its commercial counter parties. If that is true, why is the market now more volatile, more risky and more leveraged than it was prior to the introduction of CDSs? Why did our government just bail out AIG to the tune of $188b, passing on another $13b to Goldman Sachs (in addition to Goldman’s $10b) to "compensate" them for unwound CDSs? Credit default swaps are traded to make money for traders, not reduce risk! All this does is increase the velocity of speculative cash flow, dramatically increasing risk and leverage.

I urge you in no uncertain terms, to sponsor legislation outlawing CDS derivatives trading. If we do not halt market speculation in derivatives, our economy will inevitably undergo another, if not several, severe crisis, of which we may not recover. Deleveraging must occur now, however painful and unpleasant it may be. We must reduce debt and encourage savings, not speculation in derivatives such as CDSs.

Simply adding a limited regulatory framework and the reporting of derivatives trading will not avoid another catastrophic event. We need a major structural change of our banking, regulatory and securities industry, not a minor adjustment.

Sincerely, 

John C. Harrington