Warren Buffett once called credit default swaps "financial weapons of mass destruction" — and later bought a mess of them.

Why would the Oracle of Omaha turn such a seeming hypocrite?

He didn't.  Not really.  When he got CDSs, he did it to protect himself against possible losses on actual investments he'd made.  A CDS, you see, gives the purchaser an insurance policy against Bad Things that could happen to a firm whose stock, bonds, or other securities you've invested in.  If the outfit defaults on a loan, drops below $X million in market value, delists from a stock exchange, or moves headquarters to Antigua all of a sudden – to name a few examples of possible "credit default" events — your investment likely will look shakier than when you acquired it.  The CDS helps assure that you'll at least get your money back.

Mr. Buffett had in mind a different kind of CDS buyer — ones who just liked to bet that Bad Things will occur.  Speculators.  Riff-raff.  Hooligans.  Worse — market manipulators!  If enough of them elbow their way into the notional $583 trillion market — yes, Blawgletter did say trillion — too many folks would want the Bad Things.  Which really screws up the investing community's incentives.  Makes the effect of Bad Things on the financial system and the broader economy unpredictable.  Possibly causing a meltdown.  Which it almost did in 2008.

Okay.  So Congress passes financial reform — the Dodd-Frank law — in 2010.  The statute includes a direction for the Securities and Exchange Commission to write rules that would make CDSs and like instruments less dangerous.  The rulebook must cover exchanges and facilities that trade CDSs.  The SEC came out with the rulebook in October 2010.

Last week, the Department of Justice said it liked the SEC's draft but offered an improvement in one area.  Wall Street, the DOJ's Antitrust Division said, shouldn't control the game.  The rules should bar Wall Street from owning 50 percent or more of these Securities-Based Swap Execution Facilities and National Securities Exchanges, the Division's Chief, Christine Varney, wrote.  Indeed, firms that buy and sell CDSs or otherwise participate in the CDS industry should own more like 40 percent — tops.

Why, you ask?  Do you really need to ask?  If you let an industry run the game, it will find a way to game the game.  Add in people who have no reason to game the game.  Let them collectively exercise control.  Allow Wall Street firms to contribute their sponsorship and expertise.  But, please, don't let the fox guard the hen house.  Because we already know what'll happen to the hens then.