Execs at CFTC answer critic from Vatican

Pope Francis' attack on derivatives has drawn a respectful but forceful response from two leaders of the Commodity Futures Trading Commission.

A July 21 letter to the Vatican from CFTC Chairman J. Christopher Giancarlo and Bruce Tuckman, the agency's chief economist, came in response to a bulletin issued by the Vatican on May 17. The bulletin, a broad critique of the financial services industry, attacked the use of speculation in derivatives and also said credit default swaps "permit gambling at the risk of the bankruptcy of a third party, even to those who haven't taken any such risk of credit earlier."

"We write to you as finance professionals striving to lead moral lives," the letter said, adding that Mr. Giancarlo is a practicing Roman Catholic.

The letter said derivatives serve the needs of society "to help moderate price, supply and other commercial risks to free up capital for economic growth, job creation and prosperity."

"Derivatives products allow the risks of variable production costs, such as the price of raw materials, energy, foreign currency and interest rates, to be transferred from those who cannot afford them to those who can."

The two agreed with the Vatican in "being skeptical of overly complex derivative products, like CDS tranches on mortgage-backed securities, which traded in great volume in the run-up to the 2007-2009 financial crisis."